It would be easy to think that 100 per cent mortgages are making some sort of return to the market.
Buckinghamshire Building Society’s latest offering is a Family Assist Mortgage available to first-time buyers who are finding it difficult to raise a deposit. They can borrow up to 100 per cent of the purchase price, with parents or grandparents providing the additional security using the equity in their property.
Parental help
The parents or grandparents must have minimum remaining equity of £130,000, and the maximum loan-to-value (LTV) is based on the number of bedrooms in their house.
The Post Office has also launched a Family Link Mortgage for first-time buyers to get a mortgage without a deposit. Instead, borrowers take out a 90 per cent LTV mortgage from the Post Office and then raise the other 10 per cent as a mortgage secured against a close relative’s home.
These follow other more long-standing products.
Barclays is offering a mortgage whereby families must deposit 10 per cent of the purchase price into a Helpful Start Account. Savings will be returned with interest after a three-year term provided mortgage payments are kept up to date.
Aldermore also offers a product where a guarantee will be required from a parent, step parent or grandparent for a mortgage of more than 75 per cent LTV.
The guarantee will be secured by a collateral charge on the guarantors’ residential property, and the amount of the guarantee will be capped at the original agreed amount.
How fast these 100 per cent mortgages grow is dependent on how much advisers are willing to recommend them to their clients.
Dean Mason, owner and director of Masons Financial Planning, says brokers are still nervous about 100 per cent mortgages and are less likely to recommend them to clients.
Mr Mason adds: “They would rather advise the client to save up and come back with a 5 per cent mortgage deposit. Compliance rules all our lives at the moment. It is very much a case of saying, ‘if you don’t need to move, save up, get some cash and when you have got the cash, you can move’.
“Brokers also do not want to be tied to anything that gives ambulance chasers a chance to say you should not have sold customers this type of product. We need to be very careful with that.”
Innovative mortgages
However, Mr Mason says that there is a need for 100 per cent mortgages in the market.
He explains: “[The products are innovative] because they protect the lender. It also benefits the people who do not have wealthy parents or grandparents, but they have equity to help children or the grandchildren.”
Key points
- More lenders are offering 100 per cent LTV mortgages
- Many of them come with parental guarantee
- There is no fear yet of a return to pre-credit crunch days
Carl Shave, director at Just Mortgage Brokers, says: “Lenders are getting more interest, but they do have quite strict guidelines. These mortgages are not going to be things that will work for everyone, but they will work for some.”
Before the financial crash 10 years ago, 100 per cent mortgages were rife and the criteria was far less stringent than it is today.
Figures from Moneyfacts show that in August 2007, the number of 100 per cent mortgages stood at 238.
By the following year the number had plunged to 14, reaching its lowest figure in 2012 and 2013 when there were only five.
The numbers remained in single digits until 2017 when there were 11 such mortgages. So far this year there are around 18 products offering 100 per cent LTV.
Mr Shave says the mortgages are still a very niche product in the market. And the few that have sprung up are under a different guise to the likes of the Northern Rock mortgages, where people were allowed to borrow as much as 125 per cent of the mortgage value.
He adds: “I don’t think the market is going crazy because there are only a few products. It is not something that will be prolific, it’s just that lenders are doing them in a calculated way.”
Additional security
In agreement, David Hollingworth director at L&C Mortgages, says the market is a long way away from declaring that 100 per cent mortgages have re-entered the market.
“Lenders like Family BS, Barclays, Bath BS and Aldermore, and more recently the Post Office, are just some of the lenders using parental help to boost the LTV to 95 per cent or 100 per cent,” he says.
“However, this is not a return to the type of 100 per cent lending that was seen before the credit crunch. Here, the parent is offering additional security to the lender, whether in the form of cash or equity, so the lender still has added security.
“While you could never rule out a return to true 100 per cent lending, I still think we are some way off that point.”
Although the 100 per cent mortgages of today are seemingly different with tougher criteria and the added security element, they still come with risk. And of course, there is no guarantee that house prices will always go up.
Adviser influence
The increase in the number of lenders offering 100 per cent products is going to be driven by advisers as the majority of mortgages are sold by brokers.
Mr Mason says: “These products are great for brokers; however, the problem comes because the public don’t see them unless they are visiting a broker and the broker is recommending.
“It will only become more prevalent if the lenders advertise it more keenly, or a major player comes into the market, like a big four or big five. If that happens, you will see them start to take off. A lot of people literally do not realise it is an option.”
Gemma Harle, managing director of Intrinsic mortgage network, said: "Our view is that it is good and gives people options away from the gifted deposit. The only thing is people need to be mindful they are borrowing 100 per cent whatever way they do it.
"There is [also] potentially a bit of confusion, where you are involving another party, that makes the adviser process more tricky, because you have to make sure that everybody in the chain has received the appropriate advice and that needs to be very clear and will mean more work for the brokers.
"I don’t think the demand is less because of brokers. I think it is more how up for it are banks of mum and dad keen on raising money on their property to allow their children to buy a property. They are definitely considered but not at the forefront of people’s mind, whether that is the customer or adviser."
Lenders also remain cautious as the memories of the global financial crash are still fresh.
Greater protection
Jackie Bennett, director of mortgages at UK Finance, notes there is more protection for borrowers as advisers are heavily involved in the application process.
“The industry has worked tirelessly since the financial crisis to ensure lending is safe and responsible, creating a strong and innovative market that meets the increasingly complex needs of their customers,” Ms Bennett says.
“Lenders must undertake a strict affordability assessment in accordance with the rules outlined by the regulator. The purpose of this is to ensure that the borrower can repay their mortgage over the lifetime of the loan in all foreseeable circumstances.
“The overwhelming majority of new loans are sold under an advised process, during which customers take part in a lengthy interview with the onus being on the lender or adviser to ensure that the mortgage is suitable for the borrower’s needs.”
Mr Shave adds: “Lenders are under the spotlight so they are in a bit of a tough place, but they are still trying to find ways to help people as affordability remains a big issue.”
As the market continues to recover from the last bout of the mortgage crisis, lenders will continue to tread carefully.
Any hint of a downturn could cause them to disappear again leaving those most in need in an unfortunate position.
Ima Jackson-Obot is a features writer at Financial Adviser
