Is the 100% mortgage back?

The 100 per cent mortgage engenders equal parts fear and reverence among UK homeowners.

These now-controversial home loans prompted banks and building societies to lend the full value of a home – and sometimes even more – giving first-time buyers a crucial edge.

However, 100 percent mortgages also became the symbol of the easy credit that encapsulated the 2008 financial crash, largely disappearing in the years since.

But now a group of lenders have launched mortgages that aren’t exactly 100 percent mortgages, but aren’t far off either.

Skipton Building Society is the latest lender to introduce a 100 percent rental-to-mortgage product, though exact details have yet to be confirmed.

Skipton Group chief executive Stuart Haire has said the product will enable ‘people trapped in rental cycles – where they can’t save for a house security deposit – to access the real estate ladder and make a home’.

But are 100 percent mortgages — also known as zero-deposit mortgages — really a good idea for those trying to get up the real estate ladder?

Is 100% mortgages a good idea?

“I think 100 percent can be great for the right people,” said Peter Docker, commercial director at Generation Home.

“It’s really good for people who have a good income and high affordability, but haven’t been able to put down a down payment.”

Docker argues that the need for a 5 percent down payment to get a mortgage is arbitrary from most lenders because it’s based on the logic that unless you have a down payment, you “have no skin in the game.”

But even without a down payment, buying a home is difficult, he says, and first-time buyers will be eager to build equity in their home.

That’s even more true if they’re currently renting and can put that money into their own home instead.

In addition, banks will conduct extensive affordability checks on potential borrowers, meaning the lender will be confident that the buyer can afford the mortgage.

Others, however, worry that while home prices remain volatile, no-down mortgages carry the risk of sending borrowers into negative equity — where the value of the loan exceeds the property.

Kylie-Ann Gatecliffe, director at brokerage firm KAG Financial, said: ‘The fear of negative stocks will raise some eyebrows, and this should be a detailed conversation with all new buyers who want to pursue this as an option. However, is the risk that great compared to renting, with rising rents eating away at disposable income?’

She suggests that getting up the ladder with a fixed monthly payment may still be safer than renting and that the biggest risk with negative equity is buying and then selling real estate in quick succession.

“If the property is going to be a long-term home, market trends all point in the direction that they should see the value grow,” she added.

How do zero deposit mortgages work?

In the aftermath of the 2008-2009 financial crisis, lenders withdrew their no-deposit mortgages from the market, considering them too risky to continue lending. Today, most 100 percent mortgages available are based on a guarantee system, where a family member or friend who owns a home is listed on your mortgage.

An example is Barclays’ springboard mortgage.

This home loan works by hooking a friend or family member for missed payments.

According to financial data firm Moneyfacts, there are currently 17 zero-deposit products on the market, accounting for just 0.3 percent of the UK market.

Other options on the market include deposit-boosting home loans, such as the one offered by Generation Home, where the deposit provider acts as an interest-free lender.

Alternatively, the deposit provider gets an equity interest in the property in exchange for the loan.

Sole proprietorships with a joint borrower are also available, says Gindy Mathoon, senior mortgage advisor at Create Finance.

This is where there is a named borrower in addition to the buyer on the mortgage, but not on the title deeds. It means you can have two incomes on the mortgage without the second person taking legal ownership.

When the lender assesses affordability in this case, they will review all expenses that said borrower currently has and upon completion of the mortgage – this includes current mortgages, household bills and secured/unsecured debt. It seems to have replaced the old ‘guarantor’ mortgage,’ adds Mathoon.

It’s not yet clear how Skipton’s product will work, but the news has been well received by brokers.

‘The scheme is perfect for first-time buyers who can demonstrate that they successfully pay rent and have a clear credit profile.

“Affordability has yet to be assessed, but this will give the real estate market a much-needed boost,” said Bob Singh, founder of brokerage firm Chess Mortgages.

What other options are there for starters?

However, a zero deposit mortgage is not the only option for aspiring homeowners.

Shared ownership arrangements allow you to buy a percentage share of a property if you can’t afford the down payment or the mortgage payments on an open-market home.

It does not mean, as the name suggests, that you have to share your property with other people. Instead, you own part of the property and pay rent on the rest.

When you buy through shared ownership, you still have to make a down payment on the share you own, but it’s only a down payment on your share, so it will be significantly less than with any other ownership.

Cambridge Building Society offers a rent repayment scheme. Launched in 2017, it gives local first-time buyers 70 percent of their rent back after three years to use as a down payment to buy a home they might not otherwise be able to save for.

The mortgage bank currently has a small portfolio of just five properties, but expects to grow the scheme in the near future.