A new mortgage product introduced by Skipton Building Society will allow first-time home buyers in the UK to purchase a home with a no-deposit 100% mortgage loan. And while that’s great news for renters who haven’t been able to save for a down payment, due to rising rents and the high cost of living, there are risks involved.
UK renters will now be able to take out a loan covering 100% of the value of a home without a guarantor. What could go wrong?
Charlotte Harrison, interim CEO of home financing at Skipton, argues that people finding it impossible to become homeowners is “having a massive impact on the fabric of our society.”
The new 100% mortgage, created for first-time buyers who are currently renting, carries a fixed rate of 5.49% for the first five years and spans a maximum term of 35 years.
WHY NOW?
For the first time since 2008, UK renters can take advantage of no-deposit 100% mortgage loans to become homeowners. But why push a mortgage product like this right now?
In 2008, some building societies (like Skipton) offered mortgages that covered up to 125% of a home’s vetted appraisal value, which meant many homebuyers were underwater with their mortgage right from the start.
Many of those high LTV (loan-to-value) products were then yanked from the market when the country spiraled into financial crisis.
Speaking of this year’s 100% mortgage product, Skipton said it would make sure monthly mortgage payments for borrowers do not exceed the average of their last six month’s worth of rental costs.
Skipton’s offer is available exclusively to first-time home buyers, and approval depends on affordability, applicant credit scores, and a solid track record of on-time rental payments over a minimum of 12 months.
In a press release, Skipton described this offer as “a lifeline to tenants…to help them break out of their trapped rental cycles and onto the property ladder for the first time.”
Charlotte Harrison - Interim CEO of Home Financing at Skipton
According to Skipton’s research, 35% of UK renters are struggling to build up any savings due to inflation and rising rent costs.
THE RISKS INVOLVED
While this type of loan could benefit first-time buyers who haven’t been able to save for a down payment, there are concerns about the risks involved—especially since home prices in the UK could continue to fall.
This means that, as advisers, we will need to make sure clients understand the risk of negative equity very clearly.
Rita Kohli - Managing Director at The Mortgage Shop
Graham Cox sees the 100% loan as dangerous for borrowers, who could easily “overextend themselves” and end up with a financial nightmare.
The slightest fall in house prices … will leave homeowners in negative equity, with the property worth less than the mortgage balance,” Cox said. “Not a great place to be if your income drops and you need to sell.
Graham Cox - Founder at Self Employed Mortgage Hub...
Posted by:
Sarah Lentz
May 17, 2023
