Lenders need to offer 100% mortgages to prevent first-time buyers relying exclusively on the Bank of Mum and Dad.
That’s according to a new report by the Building Societies Association (BSA) that says 87% of its members think the Bank of Mum and Dad will continue to grow in importance over the next five to 10 years.
The BSA says its members must be more innovative in the products they offer first-time buyers, and greater lending at 100% loan-to-value (LTV) is one of its main suggestions.
What are 100% mortgages?
A 100% mortgage is a loan on the full value of a property – meaning you purchase it without a deposit.
This might sound appealing, but there are significant risks – including negative equity, where you owe more on your mortgage than your property is worth. With a 100% mortgage, even a small drop in house prices could leave you in this situation.
There are also big risks for the lender – and for this reason, they are often reluctant to offer 100% deals. Building societies supply around 30% of first-time buyer mortgages, with banks lending the rest, and the BSA feels its members need to be more dynamic when it comes to deposit-free deals.
It says there is currently ‘no single killer product that will transform the affordability picture for first-time buyers’, but that it expects lenders to ‘push harder in the direction of 100% loan-to-value products’.
- Find out more: 100% mortgages
Types of 100% mortgage
At the moment, you can only get a 100% mortgage if you have a guarantor, which means someone (usually a parent) willing to guarantee to cover your mortgage if you miss repayments.
There are various forms that this type of mortgage can take, detailed in the table below, but they are collectively known as guarantor mortgages (or, sometimes, ‘family assist’ mortgages).
|Type of guarantor mortgage||How it works||Risks and drawbacks|
|Family deposit mortgage||A family member deposits cash (10-20% of the property’s value) in a special savings account, where the money is held as security against a 100% mortgage.||The family member might not earn a good rate of interest on their savings and must lock them up for the long term.|
|Family offset mortgage||A family member deposits cash into a savings account (as above), but your mortgage interest will be calculated on the total mortgage minus the amount that’s held in the savings account – meaning cheaper repayments.||The family member won’t earn any interest on their savings.|
|Family link mortgage||Combines a 90% mortgage on the first-time buyer’s home with a 10% mortgage on the family member’s home.||The family member will need to be mortgage-free and their home will be at risk if you default.|
|Joint mortgage||The family member and first-time buyer take out the mortgage together and are both named on the mortgage agreement, meaning that both incomes are taken into account and you can potentially borrow more.||The family member will officially own a second home, will need to pay stamp duty at the additional rate and could face capital gains tax bills.|
|Joint borrower, sole proprietor mortgage (JBSP)||As above, but only the first-time buyer is named on the property deeds.||Older family members may struggle to get accepted; deals aren’t commonly available.|
The BSA says its members are already offering many of these types of deals, with 59% of building societies accepting family deposits as security, 33% accepting charges on a property belonging to a family member, and 10% offering family offset mortgages.
- Find out more: guarantor mortgages
How new 100% mortgages could work
The BSA believes that building societies could offer a ‘small percentage’ of first-time buyer deals at 100% LTV without ‘significant compromise to their overall lending book’.
In terms of how 100% deals could work in the future, it suggests that lenders could adopt the following strategies:
- Mitigating risks by only offering 100% loans to borrowers in certain professions, those with a high probability of substantial inheritance or those with parental guarantees.
- Take advantage of low interest rates on mortgages to offer LTVs of up to 100%, using overpayments in early years to reduce the LTV rapidly.
- Mortgage Indemnity Guarantee (MIG) insurers could provide cover for loans beyond 95%, especially if MIG came in at a higher LTV.
Stress testing for first-time buyers
The BSA says that the stress tests used by lenders should more closely reflect the real-life economic situation, rather than using theoretical figures.
It says that, with mortgage rates currently below 3%, lenders testing affordability at 5.5% or 6% ‘risks freezing many would-be first-time buyers out of home ownership’, especially given the Bank of England’s guidance that any increases in its base rate will only be incremental.
The BSA says this situation is also aggravated by lending rules not considering the likelihood of an applicant’s income growing.
Find out more: mortgage calculator – how much could you borrow?
Ways parents help first-time buyers
While there are a variety of methods that parents use to help their children fund a property purchase, including downsizing and equity release, BSA members say that gifted deposits remain the most popular.
The chart below shows the percentage of building societies that cite each source of finance as being important for first-time buyer deposits.
Schemes for first-time buyers
One of the most obvious issues with relying on the Bank of Mum and Dad to get first-time buyers onto the ladder is that it only works for well-off families.
With this in mind, many buyers use government-backed schemes such as Help to Buy, where a portion of the property’s value is put forward by the government as an equity loan.
The BSA claims, however, that even these schemes are skewed towards richer families: ‘There is a sense that several schemes – for example, the Help to Buy equity loan scheme and Help to Buy and lifetime Isas – primarily help the better-off to get on the housing ladder.
- Find out more: how to save for a mortgage deposit