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11 Mar 2019

Barclays cuts guarantor mortgage rate - but are 100% home loans worth the risk?

High-street bank undercuts Lloyds Bank, which launched similar deal in January

The return of 100% mortgages has been touted as a way to help beleaguered first-time buyers get onto the property ladder, and one of the most visible deals has just got cheaper as Barclays has cut rates on its 100% guarantor mortgage.

The bank's 100% Family Springboard mortgage, which does not require the borrower to put down a deposit, now has a reduced rate of 2.95% from 3% previously. This makes it cheaper than high-street rival Lloyds Bank, which launched a similar deal earlier this year.

It also makes the deal cheaper than many 95% loan-to-value (LTV) mortgages, which require buyers to put down a deposit of at least 5%.

Mortgages allowing you to borrow 100% of a property's value were deemed to be a major contributor to the property crisis of 2008, but more than a decade later, are they worth considering?

Which? examines the 100% mortgage market, and explains the benefits and risks of the controversial loans, which have seen a resurgence this year.

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What is a 100% mortgage?

A 100% mortgage is a loan for the entire purchase price of a property, which does not require the borrower to pay a deposit.

However, they would still potentially have to pay forstamp duty(although there's none charged to first-time buyers purchasing properties worth up to £300,000), as well as mortgage and legal fees, and the cost of a house survey.

While they are described as '100% mortgages', the deals always require a parent or family member to act as a guarantor and are commonly known as guarantor mortgages.

The Building Societies Association (BSA) recently said that lenders should consider bringing back the risky loans, which played a part in the 2008 financial crash, to prevent buyers relying on their parents.

Read more:First-time buyers: could 100% mortgages replace the Bank of Mum and Dad?

How does Barclay's 100% mortgage work?

The Family Springboard mortgage is a three-year fixed-rate deal that allows you to borrow 100% of a property's value.

But it requires a 10% deposit from the borrower's parents, which will be returned after three years, provided all the mortgage payments are made on time.

Barclays pays 2.27% AER each year of the three-year period. By comparison, Lloyds Bank pays 2.5% AER on its similar deal.

Borrowers must be 18 and buying a home worth up to £500,000.

Here are the two Family Springboard deals:

ProductInitial rateFollow on rateLoan-to-value (LTV)APRC
3 year fixed Family Springboard2.75%3.24%95%3.2%
3 year fixed Family Springboard2.95%3.24%100%3.2%

What types of 100% mortgages are available?

Typically, 100% mortgages are only available if you have a guarantor, usually a parent who will cover the mortgage if you miss a payment.

We've broken down the different types of 100% mortgage in the table below.

Type of guarantor mortgageHow it works
Family deposit mortgageA 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.
Family offsetmortgageA 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.
Family link mortgageCombines a 90% mortgage on the first-time buyer's home with a 10% mortgage on the family member's home.
Joint mortgageThe 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.
Joint borrower, sole proprietormortgage (JBSP)As above, but only the first-time buyer is named on the property deeds.

100% mortgages: pros and cons

The main advantage of a 100% mortgage is that you don't have to go through the struggle of pulling together a deposit for a mortgage.

And as long as you meet all your mortgage repayments, there's no cost to the guarantor. They could also be a good option for those with low incomes, or with a bad credit history.

But a lot of therisk sits with the guarantor, who in some cases must put up their own home as security to back the person taking out the 100% mortgage. This means that the guarantor's home could be at risk if the borrower fails to make payments.

Another significant drawback is negative equity, where you owe more on your mortgage than the property is worth. With a 100% mortgage, a dip in the property price will immediately mean your mortgage is higher than the value of your home. This is why many lenders are also reluctant to offer 100% deals.

In the family offset mortgage, the family member won't earn any interest on their savings, while on a joint mortgage the family member will need to pay stamp duty at the additional rate and face capital gains tax bills.

This stamp duty trap can be circumvented with a 'joint borrower, sole proprietor' mortgage, however.