BAM Key Details:
- 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.
- Borrowers in the U.S. and Canada may be wondering if this type of mortgage is coming to their country’s banks.
- Given our inventory situation in the U.S., the availability of 100% mortgages would not address the real issue in today’s market.
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.”
We recognise there’s a clear gap in the market for people who have a strong history of making rental payments over a period of time so can evidence affordability of a mortgage.
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.
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.
To eliminate—or at least minimize—the risk of negative equity for borrowers, the bar to entry must be higher than for lower LTV loans.
That will mean that the maximum people can borrow could be less than with other mortgages, meaning that the gap between the house price the buyer aspires to purchase and the amount they can borrow is particularly large.
It’s just possible that getting more UK renters to enter the housing market may be part of a larger strategy to drive up home values, which would (hopefully) all but eliminate the danger of negative equity for these 100% mortgage borrowers.
The problem is, that isn’t likely to happen with a “severe shortage” of homes available to first-time buyers, as Jonathan Long, head of corporate real estate at bank Investec, described it to CNBC.
If there’s a larger structural problem in the British housing market, simply giving Brits better access to homeownership won’t really solve anything.
Will the U.S. or Canada offer this type of loan?
Given the severe shortage of affordable homes in the U.S., it’s fair to guess that mortgage products like the one introduced by Skipton Building Society wouldn’t make much sense here.
What we need are policies and initiatives to stimulate the construction of affordable housing for first-time buyers—particularly those who stand little chance of finding and purchasing an affordable home in their area.
Depending on Canada’s inventory situation, this high LTV mortgage product may make just as much sense there as it does in the U.S. (meaning “zero”).
New construction doesn’t solve the issue when most of those new homes are priced well above the median and far beyond the price range of many potential buyers.
Takeaways for real estate agents
Encourage your buyer clients to make as large a down payment as they reasonably can to minimize the risk of going underwater with their mortgage—even though home prices in the U.S. are more likely to continue climbing, especially as inventory remains historically low.
And as a member of your local community, do what you can to push for policies that stimulate the construction of affordable homes, so more renters in your area can become homeowners.
