Can you still get this type of mortgage?
100% mortgages were once the preferred business of lenders and borrowers. This was the way most lenders got the borrowers under their list of clients, and this was the way borrowers, especially first time buyers, could get a house without any sort of deposit. The home loan was a success for quite some time; however, after the most recent recession and resulting decline of housing prices, a 100% mortgage as a home loan option has fallen out of favor.
What are 100 percent mortgages?
Normally, before anyone can get a loan for a housing property, they need to put a deposit on the house. This guarantees the banks that they will not lose profits if something undesirable happens to the borrower’s account. If they have a deposit, then the bank can simply keep the deposit to make up for any money they lost.
In 100 percent mortgages, the home buyers doesn’t need to give a deposit to the bank in order to obtain a housing loan. The banks were able to offer this during the time when housing prices were booming. A bank could simply give out a full loan to a borrower (even with bad credit) without worrying about the danger of repossessions or non-payments from the borrower. Since the prices of the houses were increasing, a bank would still have more than what they loaned to a borrower after only a few months. For example, if a bank lent a borrower 100% of the housing cost, then the value of that property would increase beyond the original value that the bank originally lent to the borrower because the housing prices were steadily increasing. This would apply if the same property got repossessed.
What happened to these type of mortgages?
These loans were very popular in the years when housing prices were rapidly increasing. However, due to the recent decline in the economy and prices of housing, these home loans are no longer an option for most of the lenders. As the price of housing in the UK continues to decline, banks are becoming even more stringent with loaning out money.
After 2007, the price of housing slowly declined. According to Halifax, in 2007 the average price for a house in the UK was about £199,600, and in 2011 the average housing price was about £161,132. In the span of just four years, the housing prices in the UK dropped 19%. This decline has made numerous homeowners have a mortgage debt that is bigger than the market value of their home.
Another reason why 100% mortgages are not current available is because of the new capital adequacy rules that were introduced in January of 2008, which tax the bank for any LTV higher than 75%. Due to this, the banks charge the borrower a higher premium for LTVs higher than 75%.
These type of mortgages will not be appearing any time soon as housing prices have not yet recovered enough for banks to be confident enough to offer them again. Home buyers should consider another type of mortgage like a buy to let mortgage if they wish to buy a house in 2010, 2011, 2012 and beyond.
This document does not constitute financial advice under the Financial Services and Markets Act 2000. If you require such advice, you should seek appropriate professional advice.