What is the Loan-To-Value ratio (LTV)?
The loan to value ratio of a mortgage indicates how much of your property you own outright (covered by your deposit, and commonly known as equity) and the amount you are borrowing (covered by your mortgage), expressed as a percentage. Therefore, a 100% LTV mortgage means that you are borrowing the entire value of the property and paying no deposit. For example, if you were to buy a property worth £500,000 on a 100% LTV mortgage, you would borrow the entire £500,000 in the form of the mortgage.
How did no deposit mortgages work?
As the name suggests, a no deposit mortgage is a type of mortgage which doesn’t require you to put down a deposit, instead lending you 100% of the money needed to purchase your property. At the height of the pre-2008 property boom, some lenders even offered a 120% mortgage, which allowed you to borrow the full value of a property plus and extra 20% to cover costs such as home improvements – something that is hard to imagine in the current financial climate.
The risks of no deposit mortgages
The biggest risk of 100% mortgages comes from a fall in house prices – as happened during the financial crisis. If you bought a house for £200,000 using a 100% mortgage, and the value of the house then dropped to £180,000, you would find yourself owing the mortgage lender more than your house was worth – a situation known as negative equity.
After the property bubble burst in 2008, many no deposit mortgage holders found themselves stranded in negative equity, faced with high repayments. Coupled with the risk of redundancies and pay cuts, this left many people at risk of losing their homes.
Alternatives to no deposit mortgages
Even with the risks inherent in 100% mortgages, many people chose them because they found that they were one of the only ways to get onto the property ladder. Since the collapse of 100% mortgages, those without a substantial deposit may have had difficulty securing a mortgage.
The second phase of the Government’s Help To Buy scheme, introduced in Autumn 2013, allows the Government to guarantee a percentage of a buyer's mortgage, so long as they have saved at least a 5% deposit, as well as fulfilling certain other criteria. The Help To Buy scheme could offer assistance to eligible mortgage seekers who can raise a minimum of 5-10% as a deposit. Several high street mortgage lenders now offer Help To Buy deals at 90% or 95% LTV. Do bear in mind that these mortgages tend to come with higher interest rates than those with a lower LTV.