100% Mortgage: A Blessing or a Curse for Renters?

Earlier this year, Skipton Building Society announced their 100% ‘Track Record Mortgage’ scheme in a bid to help renters who are struggling to save a deposit get on the property ladder. Since 2008, no other high-street lender has offered a no-deposit deal like it.

If you’re a first-time buyer looking to get on the property ladder, the idea of a 100% mortgage could be extremely appealing. This would mean first-time buyers could get on the property ladder without having to save tens of thousands of pounds for a deposit which, particularly for those who are renting, could take years to achieve. Nonetheless, industry professionals are found to have split opinions over whether the scheme will have long term benefits for the economy.

What is a 100% mortgage?

Also known as a no deposit mortgage, a 100% mortgage means borrowing the entire purchase price of a property, meaning there is no requirement to provide a deposit, which is usually a minimum of 5% of the purchase price. The borrower will, however, be required to have the funds to meet general mortgage fees, legal fees and general costs such as Stamp Duty. While this may seem like an appealing option for those trying to get onto the property ladder, it is important to understand the potential risks involved.

A brief history of 100% mortgages

Prior to the 2008 financial crash, 100% mortgages were widely available and were often given to people who had no income and no assets. 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. This type of lending was stopped in 2008 following a backlash against lenders who were deemed to be providing easy credit and lax lending.

In the years leading up to the financial crash, credit was incredibly cheap. Money was free and easy and interest rates were low. Anyone looking to buy a house had a selection of lenders to choose from and lenders would compete to offer the cheapest deals to consumers. Nowadays, there is no need for lenders to compete and mortgages are a lot harder to come by. Those looking for a mortgage are often desperate to find one bank who is willing to lend to them, meaning lenders are now able to significantly increase their profit margins.

What are the advantages of 100% mortgages?

Of course the first obvious advantage of a 100% mortgage is that it enables first-time buyers, and more particularly renters, aged 21 and above, to get onto the property ladder without the need to save for a deposit. During their research, Skipton Building Society found 8 in 10 tenants felt ‘trapped’ in the rental cycle[1]. Charlotte Harrison, CEO of home financing at Skipton, said the company recognizes that “there is a clear gap in the market for people who have a decent history of making rental payments over a period of time and can evidence affordability of a mortgage”. Skipton, therefore, intends to offer 100% mortgages to renters, subject to affordability and credit score, and evidence of a minimum of 12-months on time rental payment history.

Obtaining a 100% mortgage will also enable first-time buyers to get on the property ladder sooner, and the younger you are when taking out a mortgage, the more time you have to pay off your mortgage before retirement. Furthermore, the money you save by not having to contribute a 10% deposit, you could use the same money for other things, such as home improvements, or overpayments on your mortgage. This may have further benefits too, if, for example, you buy a house where renovations are required that will ultimately increase the value of the property.

[1] Press Release Article – Skipton Building Society

What are the disadvantages of 100% mortgages?

As with every financial decision, there are risks that must be weighed up and there are a few downsides to a 100% mortgage that are worth noting.

Firstly, applying for a 100% mortgage may result in first-time buyers having smaller budgets and therefore looking at cheaper and smaller properties than perhaps desired. You are also at a higher risk of falling into negative equity. This is because when you take out a 100% mortgage, you will not own any of the property that you have bought and will be in debt to the bank for the amount you purchased the property for. This could then cause you further problems in the event you decide to remortgage or sell your property.

Another important factor to note is that interest rates are usually higher for 100% mortgages than they are for standard mortgages, which in turn, means you will be paying more for a property than if you had saved a deposit – having even a 5% deposit can mean you will be able to apply for better mortgage rates. In addition, not only are interest rates likely to be higher, but the affordability and credit checks may be too strict for you. In order to obtain a 100% mortgage, you need to be in a good financial position already.

Get Help to Save With a Lifetime ISA

You may want to consider a Lifetime ISA, which is a product designed to help first-time buyers save for their future. Whether you are saving to purchase a home, or for retirement, Lifetime ISAs are available in either cash, or stocks and shares. The main benefit of a Lifetime ISA is 25% bonus you will receive from the Government on everything you save up to £4,000.00 per year. This means there is a potential for the Government to contribute £1,000.00 a year to your first-home deposit fund!

How We Can Help

If you think you might be affected by the above whether as a freeholder or leaseholder, we are here to help and advise. Contact our experienced residential conveyancing team on 01543 420000 or email info@keelys.co.uk.