Property surge expected as bank offers 100% mortgages

Mortgage applications are set to leap just days after the Central Bank flagged its concerns about growing levels of consumer debt.

The first mortgage that covers the full price of a property was launched yesterday by First Active, part of the Royal Bank of Scotland group. The lender said it had held discussions with the financial regulator about the product.

A spokeswoman for the financial regulator said it had continuing dialogue with lenders about prudent lending, but that it did not approve specific products.

Other lenders are expected to copy First Active's move, which means that people desperate to get on the property ladder will no longer have to save massive deposits.

Lenders normally advance a maximum of 92 per cent of the property price, forcing first-time buyers to save an 8 per cent deposit. First Active's 100 per cent mortgage is the first of its kind to be offered to first-time buyers on a widespread basis and could unleash a flood of new property hunters on the market.

Mortgage brokers REA yesterday described the product as the biggest development in the mortgage market in years.

However, First Active's product could fuel house price inflation, the lender admitted. "In the short term, it will release more first-time buyers on the market and there will be a little bit of a spike, but that will equalise over time," said Brendan O'Hora, head of marketing.

The launch of the 100 per cent mortgage comes in a week in which the Central Bank welcomed the slowdown in house price inflation and signalled concern about high and growing levels of household debt.

"Any significant increase in rates or downturn in economic activity in the future would cause problems for recent and more highly indebted borrowers," Central Bank governor John Hurley said on Tuesday.

Borrowing the full purchase price means that in the event of even a small dip in prices, borrowers would be landed in negative equity, owing more than the value of their homes.

First Active, which normally lends over terms of up to 40 years, said it would restrict the 100 per cent loans to a maximum of 30 years, which would allow customers to build up more equity in their homes in the early years of the loan.

First-time buyers will still need money upfront for booking deposits. However, this amount will be recoverable under the loan. Stamp duty, legal fees and furnishing costs will not.

Sarah Wellband, of REA, said there was a big demand for 100 per cent loans. "It's certainly great for parents, who have been funding their children's deposits by releasing equity from their own homes," she added.

First Active said it had seen the frustration of many first-time buyers who could afford to repay a mortgage on the full value of properties, but were finding it impossible to save huge deposits.