Skipton Building Society is set to launch a 100% mortgage aimed at first-time buyers who cannot save for a deposit. This will be the first such mortgage offered since the 2008 financial crisis, which caused many lenders to withdraw such products. Skipton’s new mortgage will target those who are “trapped in rental cycles” and do not have access to the “bank of mum and dad”. The precise details of the deal have not yet emerged, but the product will require borrowers to demonstrate a history of paying rent comparable to mortgage repayments for up to two years, with the deal fixed for more than two years to guard against the risk of negative equity. Unlike other niche products that allow people to borrow up to 100% of the purchase price, Skipton’s product will not require a family member to provide financial help.
The move could reopen debate about responsible lending at a time of uncertainty about house prices, and coincides with speculation that the government plans to resurrect the help-to-buy scheme, which closed to new applicants late last year. Higher house prices and private rents soaring to record highs are just some of the reasons why many would-be buyers are finding saving up a sufficient deposit a bigger challenge than ever. Data from Halifax earlier this year found that the average amount put down as a deposit by those buying their first home in 2022 was £62,470 – up 8% on 2021.
No-deposit mortgages have proved controversial because homebuyers who take them out are particularly vulnerable to house price falls, as they have no equity to cushion them if there is a drop in the value of their home. Even a small fall in house prices might leave some owing more on their mortgage than their home is worth. The most notorious 100%-plus mortgage was Northern Rock’s Together home loan, which allowed people to borrow up to 125% of a property’s value and was withdrawn from sale in 2008 after a backlash against easy credit and lax lending.
House Prices, Mortgages, and the Wider Economy
The connection between house prices, mortgages, and the wider economy is an important one. When house prices rise, it can stimulate economic growth as people feel wealthier and are more likely to spend money. Rising house prices can also lead to a rise in construction and related industries, creating jobs and economic activity. However, high house prices can also make it more difficult for people to afford a home, and can lead to inequality as those who own property benefit while those who do not are left behind.
Mortgages are an important part of the economy because they allow people to purchase homes that they might not be able to afford outright. However, the availability of mortgages and the level of interest rates can also affect the housing market. When interest rates are low, more people are likely to take out mortgages, which can drive up demand for homes and push up house prices. This can be good news for those who already own property, but can make it harder for first-time buyers to get a foot on the property ladder.
Subprime Mortgages Again?
It should be stressed that Skipton is a Building Society that doesn’t have a remit to securitise bundles of 100% mortgages as financial products to be bought and sold on the market place. Skipton is also rather small in its sector. Whatever happens, these 100% mortgages are not going to bring the UK financial sector to its knees. However, as with Fannie Mae and Freddie Mac in the US in 2007/8, this new ‘pay nothing now’ scheme is concerning. Naturally, those who will gravitate to such opportunities are those in the lowest income brackets. If there is a huge economic downturn, it is this economic group who are most likely to lose their job or get a cut in pay. They will pay large sums of money paying off the mortgage only to see, finally, their house taken away from them.
The other slightly less worrying scenario is that house prices start to fall and holders of these 100% Skipton mortgages find themselves with negative equity. If they can ride out the storm, then the chances are that over time the property will be worth more than they pay in mortgage costs. If they have to move, they face a hole in their finances.
The other worry is for depositors at Skipton Building Society. The worse case scenario is lots of defaults on mortgage payments and the building society repossessing masses of houses that have negative equity. How resilient the building society is, and how willing other financial institutions or the government will be to offer financial assistance are questions that no one wants to find the answers to.
A Break-Down of the Skipton 100% Mortgage
Firstly, applicants have to show proof of 12 months of continuous rental payments, along with regular and up-to-date payments for council tax, energy bills, mobile phone bills and even Netflix subscription fees. Any defaults on payments will show up on the applicants’ credit report.
The traditional method for calculating credit limits for property purchase is to lend 4 or 4.5 times the annual income of the applicant. Under Skipton’s new mortgages this rule is replaced by setting the cap as the same as the monthly rent. Thanks to the ever-helpful Martin Lewis for breaking this down. Thus, on a 25-year mortgage someone paying £500 in rent a month would be able to release £81,000 for house purchase. Someone paying £1,000 a month could secure a mortgage worth £163,000. That is far below the average house price in the UK which now stands at £238,000. To get that sort of money you would need to be paying a monthly rental of £1,300.
If someone can pay £1,300 in rent (outside of London), can they not then also manage to save for a deposit? Even a small deposit? They could, for instance, move to a cheaper rental property for 12 months and use the saving to use as a deposit.
Why a Deposit?
From a financial perspective, Skipton’s 100% mortgages are bad value. The interest rate on the mortgage is 5.49% with zero set up fees. That means a yearly fee of £22,080 on a £300,000 property! If you buy with a loan-to-value of 60% (namely you borrow 60% of the money and pay a deposit worth 40% of the property) you can expect a yearly mortgage bill of £11,562. That is nearly half the price!
If you have ‘capital’ houses become cheaper. Those struggling to pay the bills and have little to no excess income to put away for a mortgage are the ones penalised with high interest rates. Even managing to scrape together a 5% deposit will save the buyer over £2,000 a year.
What Does Martin Lewis Think?
He gives his guarded approval saying it could be a ‘sensible’ option for some. For those who want to get on the housing ladder quickly, have secure employment and worry about housing insecurity under the rental system that has seen spiralling increases in rent, this might be a good option. If only for a while. The option is there to overpay and reduce the mortgage length. There is also the future option of moving on to a different mortgage further on down the line.
However, Martin Lewis strikes a pertinent note about how the media has colluded in making people view property as an investment opportunity rather than a home to raise a family:
“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 over-stretch your finances. 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.”
Martin Lewis
In Summary
Overall, Skipton’s decision to offer a 100% mortgage is likely to be welcomed by first-time buyers who have struggled to save up a deposit. However, there will be concerns about the risks associated with no-deposit mortgages and whether such products are responsible in the current economic climate. It remains to be seen whether other lenders will follow Skipton’s lead and start offering similar products.
