Two thirds of financial advisers are worried about the risks of 100% mortgages
Two-thirds of financial advisers are concerned about 100% mortgages as falling house prices and rising interest rates could trigger a ‘mortgage crisis’
- Lender Skipton launched a 100% mortgage for first-time buyers last week
- Falling house prices could leave homeowners with negative equity
- Experts warn that the risks of a 100% mortgage could cause an amortization crisis
Six in 10 independent financial advisers are concerned that 100 percent mortgages will create an “annuity crisis,” according to a new survey.
Lender Skipton Building Society launched a 100 percent mortgage for first-time buyers last week.
It means buyers can buy a home without having to save – one of the biggest hurdles for those trying to get up the housing ladder.
However, the product leaves buyers with the risk of negative equity, where the loan for the home exceeds the value of the property, making it difficult to sell or re-mortgage if prices fall.
Proceed with caution: 100% mortgages can help first-time buyers up the housing ladder, but there are several risks they should be aware of
This is the concern expressed by 63 percent of financial advisors dealing with mortgage applications, according to new research from polling firm Opinium.
Alexa Nightingale, head of financial services research at Opinium said: ‘There’s no question that 100 percent mortgages are likely to help first-time buyers up the real estate ladder, and the rationale behind using rent payments as part of affordability checks could undoubtedly be helpful to those who have only rented.
But with recent warnings from experts such as Andrew Bailey, Governor of the Bank of England, that buyers and banks should be “very careful” with these sorts of deals, it’s clear that it’s important to keep the potential risks in mind when considering this mortgage form.’
Overall, two-thirds of financial advisers said they were concerned about the risks of this type of loan.
Similarly, 61 percent are concerned that 100 percent mortgages could trigger a mortgage crisis if interest rates rise.
Interest rates rose sharply in October when the then Chancellor, Kwasi Kwarteng, announced a wave of unfunded tax cuts that confused bond markets and pushed up the price of borrowing.
Since the beginning of the year, mortgage rates have been slowly falling and now appear to be around 4 to 5 percent. But as the Bank of England continues to raise its base rate – now at 4.5 per cent – there are fears that mortgage rates will also rise.
According to Moneyfacts, the average two-year fixed mortgage rate is now 5.32 percent and the five-year fixed rate is 5.03 percent.
Coupled with fears that home prices will fall due to inflation and rising interest rates, experts are skeptical about 100 percent mortgages and the risks associated with them.
Elevated: Mortgage rates peaked last year and are slowly falling – but they remain well above where they were two years ago, adding financial pressure to buyers
According to Halifax’s latest house price index, house prices fell 0.1 percent in April and it is unclear how house prices will react in the coming months to significantly higher mortgage rates than in recent years.
A third (35 percent) of financial advisors who receive mortgage applications think 100 percent mortgages are a good idea.
Despite this, 32 percent would not recommend 100 percent mortgages to their customers, and more than a third (38 percent) would not recommend them to their family, friends or loved ones.
In the past month, one in eight advisors said they’d seen an increase in inquiries about 100 percent mortgages, as well as an increase in inquiries about mortgages that use rent payments as part of their affordability checks.
The five-year fixed Skipton Track Record mortgage has a rate of 5.49 percent and a maximum term of 35 years. The maximum loan available under the scheme is £600,000.
Buyers will have to meet strict affordability criteria to qualify for a loan – and industry insiders point out that this is vastly different from these pre-2008 products.
In addition to a strong credit score, potential buyers must also demonstrate a track record of the affordability of all monthly rent and household expenses for at least the past 12 months.
They can borrow up to 4.49 times their annual income, but the mortgage payments must be equal to or less than their current rent payments. It is also clear that the mortgage product cannot be used to buy a new-build flat.
Lenders are often cautious about mortgages on these properties because they can lose value within a few years.
