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 just got cheaper as Barclays has cut rates on its 100% guarantor mortgage.
The bank’s 100% Family Springboard mortgage, which doesn't need the borrower to put down a deposit, now has a lower rate of 2.95% from 3% previously. This will make it less expensive than high-street rival Lloyds Bank, which launched an identical deal earlier this year.
It also helps make the deal less expensive than many 95% loan-to-value (LTV) mortgages, which require buyers to place down a deposit of at least 5%.
Mortgages enabling you to borrow 100% of a property’s value were deemed to be a major cause of the property crisis of 2008, but greater than a decade later, are they worth taking into consideration?
Which? examines the 100% mortgage market, and explains the benefits and risks of the controversial loans, that have seen an upsurge this year.
What is a 100% mortgage?
A 100% mortgage is really a loan for the entire purchase price of a property, which does not require the borrower to pay for a first deposit.
However, they would still potentially have to pay for stamp duty (although there’s none charged to first-time buyers purchasing properties worth up to lb300,000), in addition to mortgage and attorney's fees, and also the cost of a home survey.
While they're referred to as ‘100% mortgages‘, the deals always require a parent or member of the family to do something as a guarantor and are commonly known as guarantor mortgages.
The Building Societies Association (BSA) recently asserted lenders should think about returning the risky loans, which played a part in the 2008 financial crash, to avoid buyers counting on their parents.
Read more: First-time buyers: could 100% mortgages switch 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 takes a 10% deposit from the borrower’s parents, which is returned after 3 years, provided all the mortgage repayments are created on time.
Barclays pays 2.27% AER each year from the three-year period. In comparison, Lloyds Bank pays 2.5% AER on its similar deal.
Borrowers must be 18 and buying a home worth up to lb500,000.
Here are the two Family Springboard deals:
| Product | Initial rate | Follow on rate | Loan-to-value (LTV) | APRC |
| 3 year fixed Family Springboard | 2.75% | 3.24% | 95% | 3.2% |
| 3 year fixed Family Springboard | 2.95% | 3.24% | 100% | 3.2% |
What kinds of 100% mortgages are available?
Typically, 100% mortgages are only available if you have a guarantor, often a parent who will cover the mortgage should you miss a payment.
We’ve broken down the different sorts of 100% mortgage within the table below.
| Type of guarantor mortgage | How it works |
| Family deposit mortgage | A family member deposits cash (10-20% of the property’s value) in a special savings account, in which the money is held as security against a 100% mortgage. |
| Family offset mortgage | A family member deposits cash into a checking account (as above), but your mortgage interest will be calculated on the total mortgage minus the amount that’s locked in the savings account – meaning cheaper repayments. |
| Family link mortgage | Combines a 90% mortgage on the first-time buyer’s home having a 10% mortgage on the family member’s home. |
| Joint mortgage | The family member and first-time buyer take out the mortgage together and therefore are both named on the mortgage agreement, and therefore both incomes are taken into consideration and you can potentially borrow more. |
| Joint borrower, sole proprietor mortgage (JBSP) | As above, only the first-time buyer is named on the property deeds. |
100% mortgages: pros and cons
The main benefit of a 100% mortgage is you don’t need to go through the struggle of pulling together a deposit for any mortgage.
And as long as you meet all of your home loan repayments, there’s no cost towards the guarantor. They could also be a good option for those with low incomes, or having a poor credit history.
But a lot of the risk sits with the guarantor, who in some instances must set up their own home as security to back the person detaching the 100% mortgage. This means that the guarantor’s home could be in danger when the borrower does not make payments.
Another significant drawback is negative equity, in which you owe more about your mortgage than the property is worth. With a 100% mortgage, a dip in the property price will immediately mean your mortgage is greater than the need for your home. This is why many lenders will also be unwilling to offer 100% deals.
In the family offset mortgage, the household member won’t earn any interest on their savings, during a joint mortgage the household member will have to pay stamp duty in the additional rate and face capital gains tax bills.
This stamp duty trap could be circumvented with a ‘joint borrower, sole proprietor’ mortgage, however.
