Earlier this week, Aldermore Bank, the specialist mortgage lender, launched a new 100% mortgage deal which allows first or second time buyers to buy a new home without the need for a deposit.
The scheme, called the Family Guarantee Mortgage, offers a mortgage up to 100% of the property value, with any borrowing above 75% Loan to Value (LTV) being secured against the home of a guarantor which can be a parent, step parent or grandparent.
If the property were to be repossessed and sold, the guarantor would be liable for any shortfall between the outstanding mortgage and the sale proceeds, up to the maximum amount of the guarantee.
The deal on offer is a 3-year fixed rate at 6.48% with a £1,298 arrangement fee. There are Early Repayment Charges for the first 3 years and overpayments can be made without penalty during this time, but only up to the maximum amount of the guarantee. The interest rate is a lot higher than standard deals requiring a 10% deposit so this is definitely only for people whose options are limited.
This is one of the first 100% mortgages to be launched in the UK since the credit crunch and as such has attracted a lot of interest in the press. There is now a very small, albeit growing group of lenders offering mortgage deals to homebuyers with a deposit of less than 10% and those that do will often require some form of additional security.
Although the return of 100% mortgages has attracted some criticism, with this deal and other like it, the risk that comes with having no equity is shared between the borrower and their relative(s) acting as guarantor. It’s also important to remember that the borrower’s ability to afford their mortgage is arguably more important than how much equity they currently have.
A major frustration for a lot of first time buyers is that while they could easily afford a mortgage based on the rates currently available, they just aren’t able to save up enough of a deposit (a 10% deposit would need £16,000 based on current average house prices).
A lot of first time buyers are simply getting parents to give or lend them the cash for a deposit, but for those for whom this isn’t possible, deals like this new one from Aldermore offer an alternative by allowing parents or other family members to help out by using their own home s additional security.
What to look out for
- If you can get together a deposit of 10% then it’s well worth doing so – you’ll avoid needing a guarantor and you’ll have access to mortgage deals over 1.5% cheaper than the Aldermore scheme.
- If you’re considering buying a new home with a mortgage like this, make sure you’re fully aware of how it works and what the risks are.
- If you’re getting parents or other family to act as guarantors, then they should take separate legal advice so they also know exactly what they’re getting into.
- Look at your budget carefully and check that you can afford the mortgage repayments. If you’re at all concerned about your budget or rising interest rates then go for a fixed rate mortgage.
- When house hunting, look for a property that is likely to meet your needs for the foreseeable future. With little or no equity in your home, you may not be able to move for a period of time – particularly if house prices fall.