Beyond the Bank of Mum and Dad

Lenders should explore different ways to help more young people to buy, according to the Building Societies Association (BSA), boosting opportunities for those who may not have access to the Bank of Mum and Dad. Thousands of first-time buyers every year manage to get onto the property ladder with help from their parents, but not everyone is lucky enough to have financial support from family. A new report by the BSA says that lenders could consider a wider range of options to help first-time buyers, including revisiting the case for offering mortgages up to 100% of the property value. Currently, most lenders will only provide mortgages for up to 95% of the property value.Here, we look at some of the pros and cons of 100% mortgages.Advantages of 100% mortgagesThe obvious benefit of borrowing 100% of the property value is that there’s no need to save up a deposit. Building a deposit is often one of the biggest challenges facing first-time buyers, with those buying in areas where property prices are highest often needing to find tens of thousands of pounds even if only putting down 5% of the property value. Being able to borrow the full property price would enable first-time buyers to get on the property ladder sooner, which could be particularly beneficial in a rising property market. A few lenders, such as Barclays, Family BS, Bath BS and Aldermore already offer 100% mortgages, but only if parents agree to hold a percentage of the property purchase price in a separate savings account, or to use spare equity from their own home as additional security. Disadvantages of 100% mortgagesThe biggest drawback of 100% mortgages is that if house prices fall and the property needs to be sold homeowners could find themselves stuck in a position of negative equity. This means that they owe more than the property is worth, making it difficult to sell unless the difference between the value of the property and the mortgage can be repaid. Another downside is that 100% mortgage rates are likely to be much higher than those offered to buyers with a deposit to put down. Whilst this may not be a huge problem when interest rates are low, if they rise in future, homeowners could find their payments are no longer affordable. It’s also important to bear in mind that even if 100% mortgages did become widely available, buyers would need to meet strict affordability criteria to qualify for one. Lenders would not only examine whether your income and outgoings would enable you to afford a 100% mortgage based on today’s interest rates, but also whether you’d be able to cover monthly payments should rates rise in future.