What do experts make of new Skipton 100% mortgage?

The property industry has had a mixed reaction to Skipton Building Society launching a 100 per cent mortgage for tenants.

The five-year fixed deal comes with a rate of 5.49 percent and a maximum term of 35 years. The maximum loan available under the scheme is £600,000.

While the product is designed to help people who are stuck in a rental cycle and can’t make a down payment to buy their first home, there are concerns that buyers will become overburdened and risk falling into negative equity.

Negative equity exists when the outstanding mortgage debt on a home is higher than the value of the home itself.

Home prices fell 0.1 percent in April, according to Halifax’s latest home price index, and with another key rate hike later this week, it’s unclear how home prices will react in the coming months.

Graham Cox, founder of broker Self Employed Mortgage Hub, said: ‘I am amazed that the Prudential Regulation Authority has given Skipton the go-ahead to launch this product. It is as if we learned nothing from the global financial crisis in 2008.

“I understand the logic of helping people who are stuck with rent and can’t save for a down payment, but to me it’s treating the symptom rather than the root cause, which is that house prices are too high.

‘The great danger is that borrowers overburden themselves.

“The least fall in house prices, and I think they will fall significantly over the next 12-18 months. will leave homeowners with negative equity, where the property is worth less than the mortgage balance.

“Not a nice place to be when your income drops and you have to sell.”

What are the criteria for a 100% mortgage?

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 4.49x their 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.

Rita Kohli, managing director of The Mortgage Stop, said: ‘Skipton is one of the few lenders that actually wants to help people with some great criteria already in place.

“However, launching this in a market where house prices could fall further is worrying and means that as advisors we need to make sure clients understand the risk of undervaluation.

‘But for the right property in the right place, this is exactly what some borrowers need.

“For a client early in their career with the opportunity to advance and is able to overpay if they get raises, this could be great.”

In addition, the strict affordability criteria put a question mark on how many people will actually be approved for the loan.

Samuel Mather-Holgate adviser at Mather and Murray Financial, warns Skipton is likely to be ‘super selective’ with applications.

Others suggest that if the product is too popular, it could be withdrawn or relaunched with new criteria to limit the lender’s exposure to risk.

Others, however, see the innovation as a welcome addition to the market, suggesting that while 100 percent mortgages bring back memories of the 2008 financial crisis, it’s a different world now.

Jamie Lennox, director of Dimora Mortgages, said the criteria around credit history and affordability will likely be much stricter than historical versions to protect both the lender and the borrower.

He said: ‘The idea of ​​a 100 per cent mortgage seems oddly timed when there is so much uncertainty about the outlook for the housing market and what will happen to house prices.

“While many will have flashbacks to the 100 percent mortgages that were available in 2008, we are confident that the criteria for this product will be much stricter in terms of credit history and affordability than historical versions.”

For those who can make a down payment, the product is also available at 95 percent LTV, including gift deposits. However, Skipton said buyers with a down payment greater than 5 percent should use the standard product range.

Andrew Montlake, managing director of broker Coreco, said: ‘While I have had some concerns in the past, the time now seems right for a new type of 100 per cent mortgage, one that is underwritten with caution and with careful consideration of affordability . .

‘The Skipton product is different from what it used to be, and while it won’t suit everyone, it will help some of the new generation of homebuyers get off the rental treadmill and enjoy the security of owning a home. a house.’

How much can you borrow?

According to Rightmove, the average rent in the UK outside London was £1,190 in the first quarter of 2023.

Skipton’s mortgage calculator says that based on that amount you could get a 100 per cent mortgage of £193,972 over 25 years.

This is less than the median house price in the UK today, currently valued at £286,896 according to Halifax’s latest house price index.

With a 35-year mortgage, the total you can borrow increases to £221,865.

Looking at the calculations another way, based on the average house price in the UK over a 25-year period, monthly mortgage costs would be £1,760, a significant increase over the average monthly rent.

What’s more, for those who can come up with a 5 percent down payment to deposit into their home, Skipton’s rate is higher than others on the market.

Atom Bank currently offers an interest rate of 4.89 percent for a 95 percent mortgage. For a mid-priced home, that would mean saving a down payment of £14,400.

Choosing this rate over Skipton’s will save you nearly £6,000 over five years, with a monthly cost of £1,658.