In recent years, first-time buyers have found it increasingly tricky to get onto the housing ladder. This is Money reports that, in 2022, the average cost of a home for a first-time buyer rose 13% to £302,010, with average deposits now 21% of purchase price.
On average, a first-time buyer now needs to raise £62,470 for a deposit in order to buy a home, 8% more than in 2021.
Without help from family, and considering rising rental costs, it’s tough for many would-be buyers to save this sort of deposit. So, it’s positive news that a leading UK lender has launched the first “no-deposit” mortgage since the global financial crisis in 2008.
So, could a 100% mortgage be right for you, and what are the pros and cons? Read on to find out.
The first 100% mortgage scheme since 2008
To help renters to get onto the housing ladder, Skipton Building Society has launched the first 100% mortgage since the 2008 financial collapse.
In simple terms, this enables renters to buy their first home without putting down a deposit. This deal is different from the other no-deposit deals on the market because you won’t have to provide a guarantor.
The lender’s “Track Record Mortgage” allows tenants aged 21 and over with a strong track record of rental payments to borrow the total cost of a property on a five-year fixed rate at 5.49%, over a maximum of 35 years.
Borrowing is limited to 4.49 times income and there is a maximum property value of £600,000.
To apply, you will have to present proof of at least 12 months of on-time rental payments and a good credit history. Crucially, your mortgage payments will have to be no more than the rent you have been previously paying.
Skipton Home Financing chief executive Charlotte Harrison says: “We recognise there’s a clear gap in the market for people who have a strong history of making rental payments over a period of time and can evidence affordability of a mortgage – but there is currently no solution for them to buy a property due to lack of savings or access to family wealth.
“It is time for a rethink on these massive barriers to home ownership, and we’re proud to take the lead on bringing to the market solutions for such a massive social problem.”
100% deal won’t be suitable for everyone
While the idea of being able to buy a home without a deposit may be appealing, there are some factors to bear in mind, and the scheme won’t be suitable for everyone.
You must have been renting for at least 12 months before you apply, and you must be able to evidence these payments. The borrowing you can achieve on the property will also be limited by the repayments, as these can’t be any more than the rent you are currently paying.
So, for example, if you’re living in cheaper accommodation to save for a deposit, this scheme may not benefit you as it will limit you to a smaller mortgage. And, if you’re living at home with parents to help you to save, you won’t be eligible at all.
The scheme is likely to be more suited to those people who are living in an expensive rental property.
Negative equity will be a real concern for many
One of the main concerns expressed after the launch of the Skipton 100% scheme is that it could leave buyers in negative equity. This is where you owe more on your mortgage than your property is worth.
If you borrow the full purchase price of a home, even a small fall in house prices going forward will leave you in negative equity.
Considering that Money Week reports that the Office for Budget Responsibility (OBR) expects house prices to fall 10% by 2024, while Lloyds and Halifax expect house prices to fall 8% in 2023, you could immediately find yourself in negative equity if you borrow 100% of the purchase price.
If you then need to sell, you might owe more than the property is worth and you will be liable for that debt.
100% mortgages likely to be more expensive
Borrowing the full purchase price of a home may also end up being more expensive in the long term.
MoneyAge shares a useful example of this in practice.
Based on the current average first-time buyer house price of £238,742 across the UK, if you secure a traditional mortgage with a deposit of 15%, you will put down £35,811. This means you need a mortgage of £202,931.
At the current average interest rate of 4.22%, over a term of 25 years, this equates to a full monthly repayment of £1,096.
If you instead opt for Skipton’s 100% mortgage at a rate of 5.49% your monthly repayment would be £1,465 – equivalent to £369 more a month.
So, saving up a deposit could help you to avoid the risk of negative equity, increase your choice of lenders, and reduce your monthly repayments.
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Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.