May 12, 2023
The struggle for many first-time buyers, especially in the current economic climate, is being able to save sufficiently for the often-significant deposit needed to buy a house whilst paying for expensive rental.
Add the cost-of-living crisis and double-figure inflation into the mix and being able to save enough to meet a lender’s minimum deposit amount, which is usually 5%, can feel like an impossible task.
This week, Skipton Building Society has broken out of the usual lending mould and introduced a 100% mortgage, designed to help renters get onto the property ladder. It’s a significant move and the first deal of its kind to launch since the financial crash of 2008. Before the economic crisis in the early 2000’s, 100% mortgages were widely available but as lenders became more cautious, they were seen as too risky and were removed from the market.
However, many of the issues relating to the 2008 financial crisis were not the mortgages themselves but the absence of thorough affordability checks. In the current market, buyers are stress-tested to check if they could afford repayments if their mortgage rate was to increase in the future. Any new 100% mortgage today will be underwritten properly, with lenders only allowing those interested in the product to borrow what they can afford.
What’s the criteria for being considered for a 100% mortgage?
Unlike any previous 100% mortgages, Skipton doesn’t require applicants to have a guarantor. A bold move, but one that will add another layer of support for renters looking to buy.
Qualifying criteria for a 100% mortgage include:
- You must be 21 or over and a first-time buyer
- You need to have been renting for at least 12 consecutive months out of the past 18 and have evidence that all rent has been paid on time. You can prove this via bank statements or confirmation from your landlord or letting agent
- You can’t have missed any repayments that you have, from your phone bill to your Spotify. Any missed payments will show up on your credit report
- You can’t buy a new-build flat
Is it too good to be true?
This offering from Skipton is going to pave the way for many other lenders considering doing the same. It’s a competitive decision that will make the Building Society a favourable choice for many people wanting to buy their first home.
However, be aware that there are drawbacks of the 100% mortgage.
When you apply for any other mortgage, the amount you can borrow is based on your income and outgoings. On average, you can borrow around four-times as much as your household earns. With the Skipton 100% mortgage, affordability is also based on how much rent you currently pay.
For example, based on a 25-year mortgage term, if you’re currently paying £1,000 per month in rent, Skipton could let you borrow up to £163,000. With the average first-time house price in the South West being £270,984, your rent would need to be more than £1,500 per month to qualify. This equates to renting in affluent areas, most of which aren’t an option for those in their early twenties.
Additionally, Skipton’s 100% mortgages are a lot more expensive than those at a lower loan-to-value ratio. For a £300,000 property purchased with a 10% deposit at a five-year fixed rate over 25 years, the interest rate currently sits at 4.44% with a £999 set up fee: equating to a yearly cost of £18,103. A 100% mortgage, while it has no set-up fees, has an interest rate of 5.49%, meaning annual costs increase significantly to £22,080.
Lastly, a house with a 100% mortgage could fall into negative equity. This happens when the value of your mortgage is higher than the value of your house. If houses prices were to drop over the next few years – which they are expected to do – those with this type of mortgage are at risk of a negative equity position. If this happens, you may struggle to remortgage your home as well as move house.
Of course, house prices fluctuate so while you may enter a period of negative equity one year, an increase in house prices may bring you back into positive equity. Keeping an eye on the property market will be key when it comes to remortgaging or selling with a 100% mortgage.
So, what should I do?
There are pros and cons to the new 100% mortgage and choosing to apply will be dependent on your personal financial situation.
With the cost of renting often equal to or higher than average mortgage repayments, securing a 100% mortgage is likely to be a more attractive option for a lot of first-time buyers. This will especially be the case for those facing a lifetime of renting; paying off their own mortgage is probably preferable compared to paying off their landlord’s. While it won’t be the right option for everyone, it’s an additional choice within the property ladder mix.