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Are 100% mortgages on the way back?

Written by Sam Jones on 20 May 2015.

We were delighted to see the back of 100% mortgage as a happy consequence of the financial crisis as lenders pulled back.

Back in the heady days before 2007 there were hundreds of deals for 100 per cent loan to value mortgages from dozens of lenders.

This meant borrowers needed no deposit and could simply take out a loan for the total value of the property.

Some, such as the doomed Northern Rock, offered madcap 125% mortgages meaning borrowers could take out an extra 25% on the value of the home.

Clearly the premise was based entirey on dramatically rising house prices that would repay the loan in full and make everyone happy.

If house prices rose by 10% then a 100% mortgage deal would look more like a more sensible 90% loan to value deal.

But if house prices fall, as they did in 2009 onwards the borrowers are immediately plunged into negative equity immediately.

For borrowers who bought at the height of the market and saw big price drops 100% mortgages have been a disaster. They are in mountains of debt paying off loans for an asset that is worth less than the loan they are repaying.

After the crisis there was a consensus that 100% mortgages were a sign of over-exuberance and every borrower should have some kind of deposit.

Despite heavy mortgage regulation being introduced to toughen affordability rules around income and expenditure, nothing was said on deposits.

It’s fair enough that the regulators did not want to make tough rules. Most mortgage lenders, and borrowers, accepted the days of 100% mortgages had gone.

Indeed the days of 95% mortgages were seemingly gone as many thought they were risky for the same reasons.

But times have changes. The lack of 95% mortgages on the market in 2012 prompted significant Government intervention.

The coalition introduced a Help to Buy scheme offering a level of support to borrowers looking for a 5% deposit purchase.

We were dismayed to see this artificial boost to the housing market at a time when it was just beginning to pick up, especially in London. It could fuel an unjustified boom.

Help to Buy helped resurrect the 95% market and gave it the stamp of approval from those in power with state backing.

As the market recovered borrowers started to take out 95% deals again and now a few years have passed, are 100% deals on the way back too?

It is preferably to have a cushion of a deposit so house price drops can be cushioned before it eats into your loan.

It is also a good practice to save for a deposit and earn a house purchase even if it can prove a long and difficult process.

Bigger deposits will give you a cheaper mortgage rate in most circumstances and open the door to more choice in the sector.

Professional advisers can help you make the right choice whether that is a 50%loan to value deal or a 95% loan to value.

Our rule of thumb would be that the bigger the deposit the better but we understand different circumstances demand different deals.

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