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BLOG: 100% mortgages – the job is not done

Written by: Cameron Orcutt
There has been a lot of noise surrounding Skipton's move to reintroduce 100% mortgages after a 15-year absence. But barriers to homeownership still exist.

A 100% mortgage option is a good thing for the market and particularly for first-time buyers stuck paying vastly higher rents to finally get onto the property ladder.

With that said though…does this new product really address the real problems that first-time buyers face? Most are aware that saving for the deposit is the biggest problem to overcome, so on the surface seeing a mortgage product that requires nothing up front from the homebuyer would make people think “mission accomplished!”

The amount of fanfare surrounding this move would seem to imply it has. But this unfortunately isn’t the case, and initial details about the product show that it’s likely only to help a sliver of first-time buyers at best.

A lot of the same barriers still exist:

1) Affordability

The interest rate on a 100% mortgage will be higher. Lenders offering 100% mortgages typically charge higher interest rates to compensate for the increased risk they undertake by lending the entire purchase price. The higher interest rates can result in significantly higher monthly repayments for the borrower, making the mortgage less affordable in the long run.

Additionally, while you need to show that your rent has been higher than your projected mortgage payment, that isn’t the only way you’ll be tested for affordability. Lenders still test borrowers at interest rates several percentage points higher than the standard variable rate. In all cases this is far higher than the rent you currently pay.

2) Lending caps

Most first-time buyers are not aware of this, but the Bank of England only allows mortgage lenders to carry out 15% of new lending above 4.5x loan to income. For context, the average price to income in the UK stands at nine times currently.

While some lenders lend at above 4.5x income, many do not, and the Skipton’s product doesn’t allow borrowers to borrow past 4.5x. This is one of the big reasons that first-time buyers typically look to the Bank of Mum and Dad or to the recently closed Help to Buy programme to help bridge their financing gap.

3) Negative equity

With a 100% mortgage, the borrower immediately starts the homeownership journey with zero equity in the property. If property prices were to decline, the borrower could potentially end up in negative equity, meaning the outstanding mortgage amount is higher than the value of the property. This situation can limit the borrower’s options to sell or remortgage the property if needed.

Affordability is the main determinant that a homeowner will be able to continue making their mortgage payments and stay in their home, not negative equity. However, if the borrower’s circumstances change, and they have negative equity, it could cause harm to that customer. A longer-term fixed rate will help but if values drop this year, and the borrower has to sell sooner than they planned, then they could be in trouble.

The above is not to say that 100% mortgages shouldn’t be part of the solution, they should and will be. It is also encouraging to see evidence of previous higher rental payments being properly recognised in the underwriting process. Skipton’s new product is a bold move that could prompt other lenders to follow suit and should be applauded. However, there is still work to be done.

Cameron Orcutt is CEO and co-founder of OnLadder

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