Friday, June 9, 2023

Return of the 100% mortgage brings a mixed response

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The 100 per cent mortgage is making a comeback, after Skipton Building Society this week launched a no-deposit deal aimed exclusively at renters aspiring to buy their first home.

Mortgages allowing borrowers to take out 100 per cent of a home’s value were a feature of the UK property market in the years leading up to the 2008 financial crisis, offered by lenders such as Northern Rock, Bradford & Bingley and Portman. But when prices subsequently tumbled, leaving thousands trapped in so-called “negative equity” — when the debt on a home exceeds its value — regulators brought in stringent new affordability rules.

Skipton’s key innovation is to give renters a foothold on the property ladder while ensuring their mortgage payments do not exceed their rent for the first five years of the loan. However, some market experts warn that volatile housing market conditions threaten to put some borrowers in negative equity if house prices were to fall again.

What is Skipton offering?
The Track Record Mortgage offers those without a deposit (or strictly speaking, any deposit less than 5 per cent) a five-year fixed rate of 5.49 per cent. There are no product fees for the loan, which is only available to first-time buyers aged 21 and over. The mortgage is limited to a maximum of £600,000 and is not available on new-build flats.

There are other 100 per cent mortgages on the market but they rely on financial guarantees from third parties such as parents or grandparents to underpin the loan. Skipton instead will look at an applicant’s rental record for evidence that they will be able to afford repayments, requiring them to show a minimum 12 consecutive months of rental payments over an 18 month period.

The monthly mortgage payment cannot exceed the average monthly rent from the past six months. Applicants must also show a clean bill of credit health, with no payments missed on other debts or credit liabilities in the past six months.

So how much can I borrow?
The building society has set up a calculator on its website: fill in your monthly rental payment, decide how long you want the loan to last overall (to a maximum of 35 years) and it will show how much you can borrow.

On a rent of £1,500 a month, for instance, a tenant could take out £280,000 over 35 years, just short of the average UK house price of £287,000 given in this week’s Halifax index.

A second, more detailed part of the lending process focuses on the creditworthiness of the borrower, including their ability to pay under a hypothetical “stressed” interest rate typically 2 percentage points above the rate they would revert to after the fix ends.

What do the housing market experts and brokers think?
The return of the 100 per cent mortgage was applauded by most brokers, even as they acknowledged the historic impact of loose lending practices on those who overextended themselves before the financial crisis. This time things were different, they suggested, because UK regulators had overhauled the safeguards on mortgage affordability.

Some questioned the launch of such a high-leverage product at a time of uncertainty over UK house prices. Jamie Lennox, director at broker Dimora Mortgages, said: “The idea of a 100 per cent mortgage seems oddly timed, while there is such uncertainty around the outlook for the housing market.” Capital Economics, a consultancy, forecasts a fall of 7 per cent in UK house prices over 2023.

Most described it as a “niche product”, since many first-time buyers would continue to build up as big a deposit as possible to access better rates of interest that are offered at lower loan-to-value levels.

What does Skipton say?
Charlotte Harrison, the building society’s chief executive of home financing, insists the deal addresses the potential risks borrowers may face in future. “In building our mortgage product with these challenges at the centre we’re ensuring considerations around negative equity have been fully taken into account.”

Its cap on lending based on current rental payments is one aspect of this; another is the five-year fix, which may reassure borrowers who worry about short-term volatility in prices.

The lender also pointed out that the timing was right for aspiring first-time buyers facing a cost of living crisis, double-digit rental growth, house price growth in 2022, heightened interest rates and the end of Help to Buy, a government scheme for first-time buyers.

So if I can afford it, why not?
There’s another rub. Research suggests that in most regions of the UK, the mortgage equivalent to your monthly rent would not enable you to buy the type of home you are currently renting. You would need to find somewhere lower-priced to make the sums work.

Average rents in the south-east, for instance, are £1,190, according to property website Zoopla, which included existing as well as new tenancies in its estimates. The average capital value of rented properties in the region is £307,447. Monthly payments on a 5.49 per cent five-year fix with a mortgage of that size (a 100 per cent loan on a 35-year term) are £1,663 — 40 per cent more than the monthly rent.

Richard Donnell, Zoopla research director, says: “It’s a product that works in lower capital value markets in the north of England and Scotland . . . Sadly, access to home ownership in the south of England remains a big challenge without a sizeable deposit.”

How does it compare with 95 per cent loan-to-value deals on the market?
Five-year fixes are cheaper if a borrower can put down 5 per cent. Aaron Strutt, broker at Trinity Financial, points to Nationwide’s 4.89 per cent five-year fix with a £999 fee and Skipton’s own five-year fix at 4.91 per cent.

At a time when banks are competing hard for new business, however, Skipton’s move may bring others into the 100 per cent market. “If this mortgage is a success other banks and building societies will be keen to bring out similar products,” Strutt says.

If others didn’t follow suit, he adds, the interest generated by the mortgage this week and high demand from renters could lead to a deluge of applications. “At the moment it’s just Skipton. If they are inundated with applications there’s every chance they either pull the deal or increase the rate.”



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