In a surprising move reminiscent of the pre-2008 financial crisis era, the fourth-largest building society in the UK recently began offering no-deposit 100% mortgage loans once again. This development has sparked concerns among financial experts and policymakers who fear a potential repeat of the housing bubble and subsequent collapse that led to the global recession.
Skipton Building Society, a member-owned mutual lending and savings organization, has just introduced a new mortgage plan that allows renters in the UK to borrow up to 100% of the value of a property without a guarantor or deposit.
This is the first time a deal like this has been offered in the UK since the 2008 financial crisis.
The new plan, called Track Record Mortgage, allows applicants to borrow from 95% to 100% of a property’s value, meaning they will not need to provide a deposit of any kind if they so choose.
To ensure applicants can afford the mortgage, Skipton is capping the maximum monthly repayment at the buyer’s current average monthly rental costs over the last six months – this will determine the overall amount buyers can borrow.
Benefits and Drawbacks of the Plan
One of the benefits of the new mortgage plan is that it allows first-time buyers who cannot save for a deposit to get onto the property ladder.
This is particularly important given the rising cost of homes in the UK – the average cost of a first home in 2022 was £62,470 – up 8% from 2021, according to a recent report by The Guardian.
However, the plan also has several drawbacks – one being that borrowers may end up paying higher interest rates on their loans.
According to the Moneyfacts UK Mortgage Trends Treasury Report, the average five-year rate was 5% in March 2023, across all loan-to-value ratios.
Buyers typically get a 5.33% mortgage rate on 95% LTVs, according to the report, but the majority of buyers opt for a lower rate.
Another drawback is that borrowers may end up owing more on their mortgage than their home is worth if the value of the property falls – this can lead to negative equity, which can be financially devastating for borrowers.
Additionally, no-deposit 100% mortgage loans can be difficult to obtain as lenders may require borrowers to have a good credit score and a stable income, as well as a guarantor or co-signer, depending on the borrower’s situation.
Also, the fact that Skipton Building Society is the only lender currently offering no-deposit 100% mortgage loans means that borrowers may not have many options to choose from so the lack of competition could lead to higher interest rates and less favorable terms for borrowers.
How the New Plan Differs
Skipton’s mortgage plan is unique from others in the market in a few ways, including:
- It’s a no-deposit 100% mortgage plan, meaning that borrowers do not need to provide a deposit of any kind if they so choose.
- It’s exclusively available to renters, which aims at helping first-time buyers who cannot save for a deposit to get onto the property ladder.
- It allows applicants to borrow from 95% to 100% of a property’s value, meaning that borrowers have the option to provide a deposit if they choose to do so.
- To ensure applicants can afford the mortgage, Skipton is also capping the maximum monthly repayment at their average monthly rental costs over the last six months, which determines the overall amount borrowers can borrow.
- Skipton’s plan comes with a 5.49% interest rate and a maximum term of 35 years, which is higher than the interest rates offered by some other lenders in the market.
Potential Areas of Concern
Economists say there are several possible issues associated with these types of mortgage plans and their potential consequences for the UK housing market and economy, including:
- Limited Risk Mitigation: One of the major concerns surrounding no-deposit 100% mortgage loans is the lack of risk mitigation. With no requirement for a deposit, borrowers have no financial stake in the property they are purchasing. This lack of equity puts both the borrowers and the lenders at risk, as the loan is entirely based on the future value of the property. If property prices decline, borrowers may find themselves in negative equity, meaning they owe more on their mortgage than their property is worth. This situation can lead to financial distress and even foreclosure if borrowers are unable to meet their repayments.
- Overinflated Housing Prices: When buyers do not have to save for a deposit, they can enter the market more easily, increasing demand for properties. This increased demand, coupled with limited housing supply, can drive up prices to unsustainable levels. Such rapid inflation can create a housing bubble, where prices become detached from the underlying economic fundamentals. When the bubble bursts, it can lead to severe consequences for homeowners, lenders, and the broader economy.
- Increased Financial Instability: In the aftermath of the 2008 financial crisis, regulators implemented stricter lending standards to prevent a recurrence. These standards included requirements for larger deposits and stricter income assessments. By loosening these regulations, there is a higher likelihood of approving loans to borrowers who may not have the financial capacity to service the debt over the long term. This situation can lead to a surge in defaults and a deterioration of banks’ balance sheets, potentially causing systemic risks.
- Vulnerability to Economic Shocks: In times of economic downturn, such as recessions or job losses, borrowers with limited savings or equity in their properties are more likely to struggle to meet their mortgage obligations. This can result in a wave of foreclosures and distress sales, which further depress property prices and impact overall market stability. Lenders, in turn, face increased default risks and potential losses.
- Regulatory Concerns: The reintroduction of no-deposit 100% mortgage plans raises concerns about the efficacy of regulatory oversight. The relaxation of lending standards can be seen as a departure from the lessons learned during the 2008 crisis. Regulators must ensure that adequate safeguards are in place to protect consumers and the broader economy. Stricter affordability assessments, stress testing, and supervision of lending practices are necessary to prevent a repetition of past mistakes.
By the Numbers
Skipton’s 100% mortgage plan comes with a five-year fixed rate of 5.49%, which is higher than the interest rates offered by some other lenders in the market –the current average five-year fixed deal is 5%, according to BBC News.
However, because the interest rate is fixed for five years, it means that borrowers will have a predictable monthly payment for the duration of the fixed term.
Overall, while the availability of no-deposit 100% mortgage loans may appear enticing to prospective homebuyers, it’s crucial to recognize the risks and concerns associated with this lending practice.
As with any big financial decision, borrowers should carefully consider all options and seek professional advice before taking out any mortgage loan.
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The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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