The mortgages that crashed the economy are back

High street banks are starting to offer the same type of mortgage that crashed the UK economy in 2007.

Barclays and the Post Office are among those throwing a lifeline to first-time buyers who can’t raise a deposit by offering 100% mortgages.

No deposit mortgages

As the financial crisis burst in 2007, no deposit mortgages vanished from the scene as the economy went into meltdown.

But now they are on offer again as lenders try to lure in buyers who can afford the monthly repayments on the loan but are unable to raise the traditional 10% deposit to secure a mortgage in the normal way.

Risks

A 100% mortgage does exactly what it says on the tin.  The lender offers you the full purchase price of the property you want to buy, but there are risks involved.

The biggest danger is falling house prices.  If the value of your new home falls below the price you are paying for it then you fall into negative equity and end up paying more than the property is worth.

Last month prices dropped by 3.1% – the biggest month to month fall since 2010.

Mortgage prisoner

Once in that situation it can be very difficult to either move house or re-mortgage onto another deal and you can become a ‘mortgage prisoner.’

Finance expert Justin Modray warned potential buyers to be aware of the risks, saying: “If things go pear-shaped people could end up losing their homes to the bank or being chased for their savings.”

Family members can sometimes be asked to step in as guarantors, but a downturn in the market could put their homes at risk too.

Affordability rules

The difference between today’s 100% offers and those back in 2007 is that all deals are now subject to the more stringent affordability criteria demanded by the Mortgage Market Review.

Lenders now have to satisfy themselves that not only can the buyer afford the monthly repayments at the present time, but they must also be able to cope with the inevitable rise in interest rates from the current low level.