Up to three years ago, first time home buyers who hadn't saved a deposit were able to take advantage of schemes to buy their home with a deposit. They were offered a 100% mortgage (100 percent mortgages) which allowed them to borrow the total amount of the value of the property. For lenders this wasn't seen as a risk given the increasing price of houses; however this all came tumbling down with the changes in the economy and the evolving of credit restrictions.
Unfortunately in today's financial climate, the criteria for lending has gotten a lot tighter, particularly since house prices are falling and banks are not so keen to lend money. All of this has led mortgage providers to completely remove the 100% mortgage option.
The normal requirement for buying a home has always been that a potential buyer saved a deposit as a down payment for the house they wished to buy then arranged with a mortgage lender to borrow the balance. The logic behind this for lenders was, that it provided a measure of security for the lender. Should the buyer default on payment at any point the house could be repossessed and the lender stood a good chance of getting their money back.
While house prices were on a continual rise lenders didn't perceive a risk in making 100% loans as the continued rise in the value of the property virtually guaranteed they would get their money back. The advantage for buyers, particularly first time buyers, was that there was no struggle to try and save up a deposit.
The downside of a 100% mortgage was that usually the interest rates were a lot higher than normal mortgages, and quite often the borrower was required to take out a type of insurance known as a mortgage indemnity guarantee (MIG), which provided the lender some measure of security if the customer defaulted.
100 percent mortgages stopped primarily due to the introduction by the Government of the capital adequacy rules at the beginning of 2008. What this meant for lenders was that they had to put away an amount of money for each £1 that was lent over 75% of the property's loan to value. This is commonly known as LTV and meant their profits were reduced on each sale. For those of you who are not familiar with the term LTV it means the % of the value of the property lent as a mortgage, or the loan to value ratio. For example if you have a 25% deposit and borrowed 75% your LTV would be 75%.
The second reason why 100% mortgages stopped was that these types of mortgages are not viable when house prices are falling.
Today a new buyer is required to save up at least a 10% deposit and obviously the larger your deposit the better deal you are able to negotiate as you are perceived to be in the lower risk category. It's also important to have a good credit history when looking for a good mortgage deal. If you are struggling to build up your deposit there are some options you for you to consider.
If you look hard enough you can find a few mortgages for a 95% LTV but keep in mind when taking up these sort of offers it is highly likely that you will be paying a lot higher interest rates than normal.
Some first time home buyers have been able to get assistance from their parents, by means of the mortgage lenders taking the parents' savings into account to facilitate offering a larger mortgage.
Other alternatives that are being developed are schemes such as Homebuy Direct or building contractors who can provide a deposit in the terms of an equity loan. These schemes could work for the buyer and prove popular in the long run, but the borrowers will need to understand the implications of an equity loan. Options such as shared ownership can be considered. This is where an initial share in a home is purchased then built up over time to full ownership as your circumstances improve.
Whilst it seems highly unlikely that the 100% mortgage will return, there are always the eternal optimists who think they could return one day if house prices start rising again. But for the present we have to live with what's available.
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