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Listen now100% mortgage makes a comeback: what are the risks?
Skipton launches new no-deposit mortgage
Skipton Building Society has launched a 100% mortgage to help renters with minimal savings get onto the property ladder.
The lender is confident the deposit-free deal can help break the 'massive barriers' preventing renters owning a home, however, opinion over its introduction is split.
The governor of the Bank of England, Andrew Bailey, says the return of 100% mortgages could result in 'quite a few problems'.
Here, Which? crunches the numbers on the no-deposit deal and outlines the risks to be aware of.
How does the Skipton 100% mortgage work?
Traditionally, the minimum deposit buyers can put down to secure a mortgage is 5% or 10% - but Skipton's new offering takes a deposit out of the equation.
The Track Record Mortgage offers a five-year fixed rate of 5.49%, with no additional product fees.
The maximum mortgage loan that can be taken out is £600,000, and the maximum term is 35 years. The loan is not available on new-build flats.
- Find out more: 100% mortgages explained
Who can apply?
Skipton's new deal is only available to first-time buyers aged 21 and over, and they must meet the building society's affordability criteria.
Borrowers need to have a good recent track record of paying rent - giving proof of 12 consecutive months of rental payments over an 18-month period.
The monthly mortgage payment also cannot exceed their average monthly rent from the past six months.
For example, tenants paying an average rent of £1,000 per month will be offered a maximum monthly mortgage payment of £1,000.
Applicants must also show good credit history, with no payments missed on debts or credit commitments in the past six months.
- Find out more: how to improve your credit score
How much can be borrowed?
The table shows how much tenants can borrow for the Skipton 100% mortgage, depending on the rent they currently pay.
A first-time buyer taking out a 35-year mortgage would need to be paying about £1,540 in rent to afford the average UK house price of £287,503.
| Average rent over last six months | Mortgage term (25 years) | Mortgage term (35 years) |
|---|---|---|
| £800 | £130,401 | £149,153 |
| £1,000 | £163,002 | £186,442 |
| £1,200 | £195,602 | £223,730 |
| £1,400 | £228,202 | £261,018 |
| £1,600 | £260,803 | £298,306 |
| £1,800 | £293,403 | £335,595 |
| £2,000 | £326,003 | £372,883 |
Source: Skipton Track Record Calculator
Joint applicants who have been renting separate properties will be eligible, as long as they can both prove they have individually covered their entire rental and household payments.
Skipton allows borrowers wanting to reduce their mortgage bill to put down a small deposit of no more than 5%.
- Find out more: is owning a home cheaper than renting?
How does it compare to low-deposit mortgages?
Skipton's 100% mortgage has an interest rate of 5.49%. That's higher than the average five-year fix of 5.03%, according to Moneyfacts data.
The table below compares Skipton's new deal against the cheapest rates currently on offer for 95% and 90% mortgages. It shows how borrowers can secure cheaper mortgages if they can afford a deposit.
| Loan-to-value (LTV) | Lender | Initial rate | Revert rate | Upfront fee |
|---|---|---|---|---|
| 100% | Skipton Building Society | 5.49% | 6.29% | None |
| 95% | Digital Mortgages by Atom Bank | 4.89% | 6.9% | None |
| 90% | HSBC | 4.42% | 6.99% | £1,499 |
Source: Moneyfacts. Rates correct as of 12 May 2023.
Our examples below shows how much a first-time buyer would pay back after buying a house for £250,000 on a 25-year mortgage term.
How much you would pay with Skipton's new 100% mortgage offer:
- Deposit: £0
- Amount to borrow: £250,000
- Interest rate: 5.49%
- Monthly repayment: £1,534
- Total amount to pay back: £460,118
- Total amount to pay back + deposit: £460,118
How much you would pay with the leading 95% mortgage deal from Digital Mortgages by Atom Bank:
- Deposit: £12,500
- Amount to borrow: £237,500
- Interest rate: 4.89%
- Monthly repayment: £1,373
- Total amount to pay back: £411,967
- Total amount to pay back + deposit: £424,467
By entering details into our mortgage repayment calculator, you'll be able to see how payments change depending on the interest rate.
Why has the 100% mortgage returned?
Skipton says renters have been trapped and unable to get onto the property for too long.
Rents are at record highs and the cost of living has prevented first-time buyers from building up savings for a deposit.
Charlotte Harrison, CEO of home financing at Skipton, said: '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.'
According to Moneyfacts, other 100% mortgages are on the market - but they are dependent on financial guarantees from third parties, such as parents. Skipton's new product is also the only fixed-term deal available.
- Find out more: what's happening to the cost of renting?
Bank of England warns borrowers to be 'very careful'
Bank of England governor Andrew Bailey has expressed his concern over the reintroduction of deposit-free mortgages.
Speaking to the BBC after this week's 12th consecutive base rate hike, Mr Bailey said: 'I'm not going to say no to 100% mortgages but both lenders and borrowers have to be very careful about this.
'You can get quite a few problems. People can often get stuck with mortgages for a long period of time which they can't trade out of.'
The big risk of 100% mortgages
The biggest concern surrounding 100% mortgages is buyers falling into negative equity, which is when you owe your mortgage lender more than what your home is worth.
'Equity' refers to the current value of a property, minus the outstanding loan amount (your mortgage). If this amount comes out at a figure below zero, it means your property is in negative equity.
With house prices slipping, negative equity becomes a real issue for those with small or no deposits.
Skipton says it has been 'sensible' in its approach and 'considerations around negative equity have been fully taken into account'. It stresses that tenants won't be allowed to take on more than they can realistically afford.
- Find out more: how will negative equity affect my finances?
How has the mortgage industry reacted?
Opinion over Skipton's new product is split.
Director of London estate agency Benham and Reeves, Marc von Grundherr, said: 'In the current climate, it simply isn’t worth the risk and you’re far better off waiting and accumulating a more stable nest egg with which to place a mortgage deposit.'
On the other hand, David Hannah, chairman of Cornerstone Tax, said: 'While there are some concerns about this type of mortgage given what happened in the 2008 financial crash, I believe that a lot has been learned since then and affordability tests will be thorough.'
