Will Deposit-Free (Millennial) Mortgages Be a Thing of the Future?
5 minute read
In the wake of the financial crash of 2008, much of the blame was laid at the door of mortgage lenders for irresponsible lending – specifically, offering 100% mortgage deals to people with no deposit. For a period of time, 100% mortgages disappeared and deposit-free mortgages ceased to be an option. Now, however, they’re back – although with a twist based on lessons learned. So, what does the new generation of 100% LTV mortgages look like?
The Post Office’s Family Link Mortgage consists of two loans: a 90% LTV mortgage on the property to be purchased, with the remaining 10% taken as a loan secured against the property of a close family member. The family member must have an annual income of no less than £20,000, plus sufficient equity in their property to cover the value of the loan. Both loans are repaid by the new homeowner, who must be a first-time buyer. Effectively, it is the relative’s property that provides the deposit. The 90% loan is at a higher than usual rate of interest – 4.89% – and fixed for five years. The 10% loan is interest-free. If payments aren’t maintained, both homes are at risk.
Meanwhile, Buckinghamshire Building Society has launched the Family Assist Mortgage. Again, it’s aimed at first-time buyers struggling to save a deposit, but who have family who are willing to help. The building society lends 100% of the property purchase price, but the loan must be supported by a charge on the property of a family member. The resulting overall loan-to-value (LTV) ratio is 80%, and there must be a minimum of £130,000 equity remaining in the property. The rate on this loan is fixed at 3.89% until 30 June 2021.
What are 100% mortgages?
A 100% mortgage is exactly what it suggests – there is no requirement to put down a separate deposit, and the lender allows the borrower to borrow the full purchase price of the property. However, lenders do look for other ways to protect their interests and mitigate risk, so even though they are offering deposit-free mortgages, the loan is partially secured against the home of a family member, so they can be confident there is enough equity available for them to recover any losses.
The advantages of 100% mortgages
Many millennials are in the position of having little savings, combined with large student loans. This isn’t a helpful combination when it comes to saving for a deposit and getting a foot on the property ladder. Added to that, many parents are keen to help. If they aren’t cash-rich but do have equity in their own property, then using a deposit-free mortgage product to leverage that equity might be a useful solution. The advantage to lenders is that people who wouldn’t otherwise be able to get on the property ladder are able to access mortgages, so increasing their business.
The disadvantages of 100% mortgages
The biggest disadvantage is that if the borrower falls into financial difficulties, two homes are on the line, not just one. As far as lenders are concerned, while there is always a risk when making a loan, they are better protected with this type of 100% mortgage. The interest rates on these mortgage products are also higher than on lower LTV mortgages.
Could they become more common in the future?
According to the Office for National Statistics, the average millennial has £3,359 in accessible savings, whereas the deposit put down by the average first-time buyer is £51,821. That suggests that without some sort of scheme – such as 100% LTV mortgages – a large number of people will be excluded from the property market. Also, it is important to note that lenders are minimising the risk they take with this new generation of 100% mortgages, meaning they shouldn’t represent the kind of risk to the wider banking industry and economy that the previous version did.
Of course, fluctuations in interest rates – more specifically, interest rate rises – pose a threat, but that is true for all loans. It’s one of the elements that lenders’ affordability assessments are intended to take into account. We also don’t yet know what impact Brexit may have, or whether a Labour government might be elected that would then abolish tuition fees. However, it seems reasonable to assume that the deposit-free mortgage is a product that is here to stay, especially in the face of increased lender confidence.
Alternatives to 100% mortgages for millennials
For parents that are cash-rich, it might be better for them to simply make a cash gift to their children to help with a house deposit. Alternatively, a secured loan on the parents’ home to provide a deposit might be a cheaper option than any of the 100% LTV mortgage deals on the market. It all depends on the circumstances of the individuals concerned; a mortgage broker would be able to offer impartial advice.
How Just Mortgage Brokers can help
Although this type of 100% mortgage is a relatively new mortgage product, Just Mortgage Brokers has years of experience in helping people of all ages find the mortgage that’s right for them. Call us today, or contact us online, to discuss how we can help.