Types of 100% mortgages
100% mortgages required borrowers to have a guarantor. This was to give them some security that someone was ready and able to step in if you failed to make your payments. Almost anyone could be a guarantor, including parents, close relatives or friends, though lenders sometimes required the guarantor to be close family.
A guarantor mortgage could be set up in a few different ways. Some lenders required that a guarantor allowed a charge to be secured against their home to provide security against a proportion of the mortgage. Often referred to as using property as security, the charge typically covered between 5% and 20% of the purchase price of the home you were buying.
While a guarantor won’t own a share in your home, they would agree to make the mortgage repayments on it if you can’t. But perhaps even more importantly, if neither you nor your guarantor can pay what you should, and your home is repossessed, a lender could order the repossession of your guarantor’s home if there is a shortfall between the mortgage you still owe and how much your home is sold for.
Family deposit mortgages
Some guarantor mortgages allow a guarantor to put up savings as security rather than their home. These are known as family deposit mortgages.
Lenders may ask guarantors to make a deposit of up to 25% of the value of the home being purchased into a savings account to secure a family deposit mortgage. These savings must then remain in place for a certain number of years, or until a predetermined percentage of the mortgage is paid off.
Your guarantor will get all of their money back along with interest if you pay off your mortgage on time. However, if repayments are missed the lender may hold on to the money longer. Or if you default on your mortgage and the repossession and sale of your home don’t cover the outstanding loan, your lender may use the money in the savings account to pay it off.
Family offset mortgages
A family offset mortgage is when the total amount of your loan is reduced by the value of your guarantor’s savings. It’s similar to a family deposit mortgage except your guarantor won’t earn interest on their savings pot.
There are two types of offset mortgages:
- Reduced monthly repayment: You can use the savings to reduce the amount of interest you pay each month, making your repayments cheaper.
- Reduced mortgage term: You can use the savings to reduce the duration of your mortgage, which can also reduce the amount of interest you’re charged.