Almas Uddin
Founder and Mortgage Advisor
11 May 2023
This week saw the announcement of a new 100% mortgage – a product that we haven’t seen on the UK market since the 2008 financial crisis. While the news may seem positive for thousands of prospective buyers, particularly first-time buyers, it isn’t necessarily for everyone!
Revolution Finance Brokers has investigated the new-to-market no-deposit mortgage to explain what it is, how it works, the eligibility criteria, and how you could potentially qualify to secure mortgage lending without any deposit at all.
Unpicking the Ins and Outs of 100% Mortgages
To clarify, there have always been options for buyers without a deposit, but before the new well-publicised mortgage product launch by Skipton, they required another way to add security. That might be using a family offset mortgage or using a guarantor, for example.
In essence, a 100% mortgage is exactly what it sounds like – it offers 100% of the cost you need to buy a property without any down payment.
The norm is to need at least a 5% deposit, which applies to the vast majority of government-backed home ownership schemes such as the mortgage guarantee scheme or Help to Buy, both of which have closed to new applicants.
Risks of 100% Mortgage Products
So, what's the catch? One of the essential factors to highlight is that even if a 100% mortgage would solve your property acquisition aspirations, it carries a significant, possibly life-changing risk.
The UK property market is in flux, a natural outcome following a global pandemic, record-high inflation, the cost-of-living crisis, and multiple consecutive base rate rises. That means mortgage rates are high, and there is a strong potential for properties to fall in value over the next few months and years.
Applicants who borrow 100% of their property value will need to pay it back (more on that shortly!). If the property drops in value, that means the borrower is in negative equity and owes their lender more than they own.
Negative equity often commands professional, independent advice since the financial pressure and lack of security are never easy to address.
That doesn’t mean a 100% no-deposit mortgage might not be a fantastic opportunity, but it won’t be the most appropriate solution for every borrower, nor is it a universally beneficial way to proceed with buying your first home.
Eligibility Criteria for the New Skipton 100% Mortgage
Back to our new product announcement, and it's also fair to say that a large proportion of first-time buyers may not be able to apply for the Skipton product (and the expected new offers from competitors) because eligibility criteria apply, as they do to all mortgage borrowing.
For this specific product, a brief summary of the terms, aside from being a first-time buyer, includes:
- Needing evidence of current rental costs that are equal to, or below, the calculated mortgage repayment cost per month.
- Having at least 12 months of proof of on-time rental payments.
- Adhering to credit check assessments and other financial affordability tests.
- Accepting a five-year fixed-rate mortgage based on a steep 5.49% interest rate.
Given the current high-interest rates, the average on a five-year fixed mortgage is around 5%, so any applicant will be tied into a fairly hefty charge, without the option to remortgage for the next five years – in which time interest rates are widely expected to fall.
Expert opinions vary, but as reported in The Guardian, economists expect the Bank of England base rate to return to the 2% target by the end of 2025 – when a 100% mortgage borrower would still have a further two years or more of repayments at 5.49%.
Are 100% Mortgages a Good Thing?
No mortgage product is good or bad – as a specialist broker, our role is to identify the lenders and the products that align with your finances, home ownership plans, long-term aspirations, income, credit history and myriad other circumstances.
On the face of it, 100% mortgages could be a lifeline for first-time buyers who simply do not have the recourse to apply for any other product. Many first-time buyers rely on family wealth to contribute to or cover the deposit or use offset or guarantor mortgages to reduce the lender’s risk and secure mortgage lending.
However, in a cost-of-living crisis, those without that privilege could find it impossible to apply for any mortgage, in which case a 100% mortgage – risks and interest rates notwithstanding – could be a viable option.
Affordability Considerations in 100% Mortgages
The soaring appreciation in residential property values in the last decade has meant it costs more now to buy a house than ever before. The average UK property price stands at £289,818, so a buyer looking to get onto the property ladder would need a standard 5% deposit of a minimum of £14,491.
Further, to qualify for a mortgage based on a generous four times their income, a buyer would need to earn at least £68,832 a year to borrow the £275,327 left after a deposit.
Joint applicants would need to earn £34,416 each on this same basis, while the UK average salary is £30,628 according to regular pay figures published by the Office for National Statistics in January 2023.
It is clear that the pace of wage rises has not kept up with property valuations, so it is potentially more difficult now to purchase a first home than at any point in history, especially for buyers with a sole income, an average salary, and no family wealth to help them along the way.
From this perspective, 100% mortgages could certainly be seen as beneficial, but affordability assessments are still part of the evaluation process, and low earners may find themselves turned down.
Changes to UK Mortgage Lender Affordability Checks
It is worth pointing out that affordability checks are, to a certain extent, out of the lender’s control, although the policies they impose are down to their underwriters.
Skipton's 100% mortgage won't disregard affordability checks since they are a regulatory requirement and essential to avoid the issues that contributed to the financial crash in 2008 – but the focus on rental payments and current outgoings could assist applicants who know they can afford the mortgage costs, regardless of what a standard assessment might say.
For example, the lender has stated that it will consider applicants who already pay rent of the same, or a higher value, than the mortgage repayments – and can prove they have made on-time payments for at least the last year.
Although caution is essential, there may be an opportunity for some first-time buyers who find themselves turned down at the first hurdle to prove they meet affordability requirements and proceed with a first-time property purchase.
For more information about 100% mortgages, this particular new product launch, or the best ways to purchase your first home, please contact the whole-of-market experts at Revolution Finance Brokers for impartial guidance.
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