The 100 per cent mortgage is making a comeback, after Skipton Constructing Society this week launched a no-deposit deal aimed completely at renters aspiring to purchase their first house.
Mortgages permitting debtors to take out 100 per cent of a house’s worth had been a characteristic of the UK property market within the years main as much as the 2008 monetary disaster, provided by lenders corresponding to Northern Rock, Bradford & Bingley and Portman. However when costs subsequently tumbled, leaving hundreds trapped in so-called “damaging fairness” — when the debt on a house exceeds its worth — regulators introduced in stringent new affordability guidelines.
Skipton’s key innovation is to provide renters a foothold on the property ladder whereas making certain their mortgage funds don’t exceed their hire for the primary 5 years of the mortgage. Nonetheless, some market specialists warn that unstable housing market circumstances threaten to place some debtors in damaging fairness if home costs had been to fall once more.
What’s Skipton providing?
The Monitor File Mortgage gives these and not using a deposit (or strictly talking, any deposit lower than 5 per cent) a five-year fastened fee of 5.49 per cent. There are not any product charges for the mortgage, which is simply obtainable to first-time consumers aged 21 and over. The mortgage is restricted to a most of £600,000 and isn’t obtainable on new-build flats.
There are different 100 per cent mortgages available on the market however they depend on monetary ensures from third events corresponding to dad and mom or grandparents to underpin the mortgage. Skipton as a substitute will have a look at an applicant’s rental document for proof that they may be capable of afford repayments, requiring them to point out a minimal 12 consecutive months of rental funds over an 18 month interval.
The month-to-month mortgage fee can not exceed the typical month-to-month hire from the previous six months. Candidates should additionally present a clear invoice of credit score well being, with no funds missed on different money owed or credit score liabilities previously six months.
So how a lot can I borrow?
The constructing society has arrange a calculator on its web site: fill in your month-to-month rental fee, determine how lengthy you need the mortgage to final general (to a most of 35 years) and it’ll present how a lot you may borrow.
On a hire of £1,500 a month, for example, a tenant might take out £280,000 over 35 years, simply in need of the typical UK home worth of £287,000 given on this week’s Halifax index.
A second, extra detailed a part of the lending course of focuses on the creditworthiness of the borrower, together with their capacity to pay underneath a hypothetical “confused” rate of interest sometimes 2 proportion factors above the speed they’d revert to after the repair ends.
What do the housing market specialists and brokers suppose?
The return of the 100 per cent mortgage was applauded by most brokers, at the same time as they acknowledged the historic impression of unfastened lending practices on those that overextended themselves earlier than the monetary disaster. This time issues had been completely different, they prompt, as a result of 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 home costs. Jamie Lennox, director at dealer Dimora Mortgages, mentioned: “The concept of a 100 per cent mortgage appears oddly timed, whereas there may be such uncertainty across the outlook for the housing market.” Capital Economics, a consultancy, forecasts a fall of seven per cent in UK home costs over 2023.
Most described it as a “area of interest product”, since many first-time consumers would proceed to construct up as massive a deposit as potential to entry higher charges of curiosity which are provided at decrease loan-to-value ranges.
What does Skipton say?
Charlotte Harrison, the constructing society’s chief government of house financing, insists the deal addresses the potential dangers debtors could face in future. “In constructing our mortgage product with these challenges on the centre we’re making certain issues round damaging fairness have been absolutely taken under consideration.”
Its cap on lending primarily based on present rental funds is one side of this; one other is the five-year repair, which can reassure debtors who fear about short-term volatility in costs.
The lender additionally identified that the timing was proper for aspiring first-time consumers dealing with a value of dwelling disaster, double-digit rental development, home worth development in 2022, heightened rates of interest and the top of Assist to Purchase, a authorities scheme for first-time consumers.
So if I can afford it, why not?
There’s one other rub. Analysis means that in most areas of the UK, the mortgage equal to your month-to-month hire wouldn’t allow you to purchase the kind of house you might be presently renting. You would want to search out someplace lower-priced to make the sums work.
Common rents within the south-east, for example, are £1,190, in keeping with property web site Zoopla, which included present in addition to new tenancies in its estimates. The common capital worth of rented properties within the area is £307,447. Month-to-month funds on a 5.49 per cent five-year repair with a mortgage of that measurement (a 100 per cent mortgage on a 35-year time period) are £1,663 — 40 per cent greater than the month-to-month hire.
Richard Donnell, Zoopla analysis director, says: “It’s a product that works in decrease capital worth markets within the north of England and Scotland . . . Sadly, entry to house possession within the south of England stays a giant problem and not using a sizeable deposit.”
How does it examine with 95 per cent loan-to-value offers available on the market?
5-year fixes are cheaper if a borrower can put down 5 per cent. Aaron Strutt, dealer at Trinity Monetary, factors to Nationwide’s 4.89 per cent five-year repair with a £999 payment and Skipton’s personal five-year repair at 4.91 per cent.
At a time when banks are competing arduous for brand spanking new enterprise, nevertheless, Skipton’s transfer could convey others into the 100 per cent market. “If this mortgage is a hit different banks and constructing societies will probably be eager to convey out related merchandise,” Strutt says.
If others didn’t comply with swimsuit, he provides, the curiosity generated by the mortgage this week and excessive demand from renters might result in a deluge of functions. “For the time being it’s simply Skipton. If they’re inundated with functions there’s each likelihood they both pull the deal or enhance the speed.”