The Good and Bad of 100% Mortgage

Buying a home with no down payment, which is known as a 100% mortgage, is the only way for some people to ever purchase a home of their own. It was a program designed to help those unable to save up a 5% down payment, or any down payment for that matter. All the extra income goes to rent, groceries, and basic living expenses. Forget the idea that some money could be saved.

The concept of a 100% mortgage is a good one. Getting a 100% mortgage means that its possible to get into a home sooner than if a down payment had to be saved first. Payments that would have gone towards rent can just be shifted to the house payment instead.

Unfortunately, the theory is not as good as most would like. The borrowers tend to get excited and buy more house than they can afford. Because there is no equity in the purchase, there is also no sense of responsibility. The default rate of 100% mortgages is higher than with other mortgage options.

Lenders have tried to make the risk as small as possible. Typically, the 100% mortgage requires a higher credit rating than other mortgages. The idea is that a desire to protect the credit rating topped with the proven responsibility that got the rating in the first place will be enough to get the borrower to pay the loan back. It is proving to be just the opposite.

If lenders can find a better way to ensure the 100% mortgage is paid back, it could continue to be a viable alternative for potential buyers who are unable to save. Otherwise, it might be a good idea to scrap this idea for a new one. An option, for the lenders or the buyers could be to look at a lower monthly payment or a shorter mortgage term.

Kathryn is a freelance journalist covering the UK lending market, and has written about specialist topics such as 100% mortgage products and also writes on mortgage news for the UK housing industry.

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