100% mortgages were hugely popular mortgage products for UK house buyers throughout the property boom years which covered the period from the turn of the millennium through to the credit crunch crash in the autumn of 2008. They enabled people to purchase a property without having to save and pay a hefty deposit at the point of purchase as the mortgage loan would cover the full value of the property being purchased.
People who would otherwise be renting were enabled to get onto the property ladder rather than continue to pay rent to a landlord, which many considered to be ‘dead money’. The vast number of people who purchased their first property in the first seven years of the new millennium by utilising a 100% mortgage may not otherwise have been able to get on to the property ladder at all had this type of mortgage product not existed. In fact, it has been said that as many as 40% of people who purchased their first property in the years proceeding the credit crunch would not have been able to do so at all under post credit crunch lending conditions.
However, despite the obvious benefits of 100% mortgages and their rise to popularity, they have always been inherently risky mortgage products, both for borrower and lender. Mortgage lenders and borrowers are protected by the equity margin in a property. That is the margin of value over and above any mortgage or loans secured against the property. With 100% mortgages there is no margin of equity at all, as the mortgage is equal to 100% of the property value. Therefore, if the property goes down in value the outstanding mortgage will be greater than the value of the property itself. This is known as ‘negative equity’, and means that the property asset is worth less than the mortgage secured against it. This is clearly not a good situation for either the borrower or the mortgage provider.
During the boom years mortgage lenders had a voracious appetite for lending, and competition for new lending business was great. Lenders started to take more and more risks in order to win business. The rise of 100% mortgages came about during this boom period, when lenders cared more about securing new lending business than the risks they were taking with some of the mortgage products they were offering. It can also be said that borrowers also turned a blind eye to the possibility of house prices turning, and therefore were willing to take the risk of purchasing a property without a deposit. People wanted to buy properties, expected them to continue to rise in value and many people have suffered since that all changed as a result of the credit crunch.
Although 100% mortgages have not been ‘banned’, there are currently no 100% mortgage products available to UK borrowers and this trend looks set to continue. If a lender were to launch a new 100% mortgage product, it would be very controversial. However, despite allowing mortgage lenders to offer higher loan to value mortgages if they wish, the regulator has now put into place more stringent capital adequacy requirements which make this type of mortgage much more expensive and far less viable for mortgage providers.
Will 100% mortgages ever return? It is unlikely in the foreseeable future, but who knows what may happen once the economy is back on track and the credit crunch is a distant memory. One thing is for sure, if 100% mortgages did return there would be lots of first time buyers ready to utilise them again. But for now, they are gone and that is probably for good.