Will the 100 per cent mortgages return

100% mortgages - where the loan covers the entire value of the property, with no deposit required - have been a relatively new phenomenon in the housing market. Until then the traditional mortgage required a deposit of at least five or ten percent of the property's value - and indeed mortgages generally were subject to far stricter acceptance conditions, relating for example to multiples of loan to earnings (traditionally 3.5 times annual salary, but recently up to 5 times a person's annual salary!)

We also saw a recent wave of 125% mortgages offered by providers such as Northern Rock. These allowed customers to take out an extra 25% value on their house and have the extra over at the same interest rate to pay associated house purchase costs, furniture or pay off more expensive debts.

Of course, these deposit-free mortgages come with significant risks, which we're all seeing now as the credit crunch hits home. The main risk is down to the high risk of default on the loan. Firstly when mortgages have been issued at very high loan to income multiples (mortgages in London were being offered at up to six or seven times the applicant's income due to extremely high house purchase prices) - the difficulty in repaying them is high. When interest rates or household bills rise- as for example they have done so with council tax and utility, food and petrol prices - it is suddenly far higher to meet the monthly mortgage payment.

Once a person has defaulted on a mortgage they face losing their home, which is a distressing and expensive process for all involved. This will also impair their credit rating and make it far harder to obtain a mortgage again in future.

The other problem with 100% mortgages is that if the housing market dips - as it is doing - and house prices fall, the homeowner is immediately plunged into negative equity. This is initially not a problem if they are not planning to sell at any time before the market recovers, and can meet their monthly payments - but it will be a problem when that person comes to the end of their mortgage deal term and has to remortgage to get a competitive rate. Without any equity in the house - or even worse - a negative equity, they will likely be obliged to switch onto their lender's standard variable rate (SVR) - which is often around 2% higher than initial favourable rates, and will push monthly mortgage payments up significantly. Once again, this increases the risk of running into arrears and eventually experiencing problems with default.

So now that we're beginning to see the fall out of these irresponsible lending practices, in the number of increased house repossessions and bankruptcies (a situation which is likely to continue worsening), it is highly unlikely that 100% mortgages will ever return any time soon. In fact even 95% mortgages may come under attack as the government pushes the financial industry to become more responsible. Although it's bad news for people needing to save large deposits, it will be better news, however, for their long term financial health and ability to meet their mortgage commitments in the future.