Desperate to join the property ladder don’t have £30,000 kick around to pay the 10% deposit on the average UK house?
Then you have probably been eyeing up Skipton’s first deposit-free mortgage product for renters that came to market last week, marking a return to 100% mortgage offers in the UK for the first time since the 2008 financial crisis.
Though 100% mortgages appear to be a viable option for struggling renters, Britain’s independent financial advisors have raised a few alarms.
According to data supplied by Opinium, two-thirds of polled IFAs are worried that 100% mortgages such as those offed by SKipton could create a repayment crisis if not managed properly.
The research shows that 12% of IFAs have seen an increase in enquiries about 100% mortgages, while 13% have seen an increase in enquiries about mortgages that use rental payments as part of their affordability checks.
32% of polled IFA would not recommend them to clients, while 38% would not recommend them to loved ones.
Alexa Nightingale, head of financial services research at Opinium commented: “It is no doubt that 100% mortgages are likely to help first-time buyers get their feet on the property ladder, and the thinking behind using rental payments as part of affordability checks could no doubt be helpful for those who have only ever rented.
But Nightingale said potential homebuyers should take heed of Bank of England governor Andrew Bailey’s warnings.
"I think we have to watch it very carefully," Bailey recently told the BBC in response to a question about 100% mortgages, continuing: “I'm not going to say no to 100% mortgages but both lenders and borrowers have to be very careful about this.”
“You can get quite a few problems. People can often get stuck with mortgages for a long period of time which they can't trade out of," he added.
How do 100% mortgages work?
Deposit-free mortgages, in which buyers own zero equity in the property from the outset, can cause buyers to slip into negative equity if house prices fall even a small amount.
This effectively means the value of the house is worth less than the loan. While not the end of the world if the buyer is content to stay out while the market hopefully recovers, it can severely limit your refinancing options.
Furthermore, selling the house in negative equity would still leave you with part of the mortgage outstanding.
Still bullish on 100% mortgages? If you’re convinced that house prices can only recover from here, then fair enough, but recent history offers a glimpse into what can happen if you fail to read the market.
Northern Rock’s rock-bottom Together mortgage
A little bank by the name of Northern Rock used to be the go-to shop for deposit-free mortgages.
In fact, Northern Rock went one even further, offering a 125% mortgage at six times yearly income under the ‘Northern Rock Together’ banner, with the extra 25% arranged as a personal loan.
Over a third of Northern Rock’s lending on residential mortgages comprised Together loans in 2006.
They allowed homebuyers to not only take out a deposit-free loan, but have enough to buy all the necessities too- furniture, appliances and anything else a new home might need.
As you might guess, it didn’t turn out too well; Together loans were one of the reasons for Northern Rock’s dramatic collapse in the aftermath of the 2008 financial crisis.
Thankfully, Skipton’s deal is a bit more conservative than Northern Rock’s.
You cannot take out a mortgage that would make monthly repayments greater than your current monthly rental repayments.
Loans are also capped at 4.5 times your average earnings.
Applicants must be first-time buyers and at least 21 years of age and must not have a record of getting into arrears.
But these safeguards also cause considerable limitations for prospective buyers.
Paying £1,000 in rent? Your mortgage will be capped at £163,000, nearly half the average Uk house price.
Earnings £35,000 a year? You’ll be limited to a £157,000 mortgage.
Plus, buying a house requires far more than just a mortgage. What about furniture and white goods? is it worth taking out a loan if you have to sleep on the floor?
These are all questions you should consider before heading down to your nearest Skipton Building Society.
"Years of property-porn TV shows have spouted the idea that you must buy a house as soon as possible, as big as possible – actually, the real priority is not to overstretch your finances,” Martin Lewis, founder of MoneySavingExpert.com, said of Skipton’s new mortgage offering “Before the 2007 financial crash, banks would simply throw mortgage loans out to anyone walking past a branch window; now we need to be more careful.”
"Skipton Building Society's criteria of requiring a good rental track record to prove someone can make mortgage payments is sensible, and so I cautiously welcome it, done carefully, after advice, as an option for some," he recommended.