The relaunch of 100% mortgages has hit the property headlines this week. So in this post we will look at exactly what’s involved with these 100% mortgages and at what the ins and outs might be.
At the time of writing, 100% mortgages are only being offered by Skipton Building Society – more about their product later.
Firstly, it’s worth remembering that 100% (and even 125%) mortgages – also thought of as no deposit needed mortgages – used to be readily available a couple of decades ago. The financial crash and tighter mortgage lending rules caused them to become a thing of the past however.
At the moment it’s possible that the launch of 100% mortgages is related to the ending of the Help to Buy scheme last March. The new product may help those who would have used that scheme to help them buy a property.
It’s also maybe true to say that offering high LTV mortgages also demonstrates a degree of lender confidence in the property market. Lenders are not likely to offer such high LTVs if they believe the market is going to crash and leave large numbers of their borrowers in negative equity.
What do the new 100% mortgages involve?
Now let’s look at the Skipton Building Society’s 100% mortgage product more closely. Some of the coverage in the mainstream press has not made it clear that this is not a 100% mortgage which is available to everyone. The new Track Record mortgageis aimed at those who are currently renting a home but want to buy – the concept being that if you can afford to pay rent you can probably afford to pay the same amount each month as a mortgage payment.
There are a number of conditions to the Track Record mortgage: It is available to first time buyers over 21 for mortgages up to £600,000 over up to 35 years. Applicants can either have no deposit, or a deposit of up to 5% available. Applicants must be able to prove they have been paying rent and household bills regularly for 12 months in a row out of the last 18 months, and have no missed payments/credit repayments over the last 6 months. It is not available on new build flats, nor flats built within the last three years.
Maximum repayments on the mortgage are linked to affordability based on income and outgoings and also, quite importantly, on current rent payments. It is affordability which serves as a maximum cap on the amount which can be borrowed.
The Track Record mortgage is a five year fixed interest rate product with no application fees. This is definitely a point to note when some commentators suggest interest rates may continue to rise over the next year or so but may then begin to fall.
Now let us look at the pros and cons of 100% mortgages generally.
Undoubtedly 100% mortgages can help more people to buy their own home. They allow people to buy who otherwise couldn’t. In particular they allow people to buy who aren’t able to save the 5% or 10% deposit that most mortgages require.
The not-so-good things about 100% mortgages are that they can potentially allow borrowers to overstretch themselves. Also if they allow more buyers to buy and pay more they could push house prices up. This can actually make things more difficult for the buyers they are aimed at.
Another thing to bear in mind is that high LTV mortgages generally are more expensive than low LTV mortgages. Borrowers will pay a higher interest rate for them, and it will cost them more in repayments. This is also true of the Skipton’s Track Record product. The interest rate is currently 5.49% – a good 1% more than it is possible to get a 95% mortgage for. Although this doesn’t sound much of a premium buyers will be able to make a good saving if they are able to raise a 5% or larger deposit.
So then, what impact might the new 100% mortgages have on the property market?
The new 100% mortgages have certainly made a splash in the news, with some commentators claiming they signal a big change in the property market. They are bound to have some impact of course. It’s likely they will encourage some first time buyers to start looking for somewhere to buy when they otherwise wouldn’t have. They might even help keep the property market going in times when many people are being more cautious about buying.
However, it’s important to remember that they are currently only available from one lender, and the conditions which apply to them are quite tight. These conditions mean that in parts of the country with high property prices they might not allow buyers to buy much, yet in cheaper areas buyers won’t need a 100% mortgage. At the end of the day it’s likely that the number of 100% mortgages that are granted will only be quite a small part of the market so the impact will be fairly limited.
Of course the mortgage market is pretty competitive. So if these new 100% mortgages prove popular it’s possible that other lenders might offer something similar too.