In 1644, English judge Sir Edward Coke was quoted as saying: “For a man’s house is his castle” and this may indeed still be the case, but, says ATEB”s Lisa Cross, rising costs and the currently turbulent mortgage market might make securing borrowing easier said than done.
In recent weeks the Skipton Building Society broke ranks and offered a 100% mortgage deal, which could be great news for first time buyers who have historically had to save for a minimum 5% deposit. There are other 100% deals on the market, but more often than not the lenders appear to require a guarantor.
The Skipton’s underwriting criteria appears to be based on prospective first-time buyers’ track record with a rental property (a 12-month track record of paying rent and household bills on time), as well as their credit score, which will be similar to the score applied to 95% Loan To Value (LTV) modelling. Income restrictions are in place with lending at no more than a 4.49 debt to income ratio and a maximum term of 35 years. The five year deal we saw was a 5.49% fixed rate when it was first offered. So looking at this comparatively…
Rent payment Maximum account The Skipton will offer
£750 per month £139,831
£1,000 per month £186,442
£1,250 per month £233,000
According to the ONS, the average house price in the UK in March 2023 was £285,000 (give or take), meaning that someone would need to be paying circa £1,500 per month in rent to be able to buy an average property, provided they passed affordability and credit checks. So, by taking on a mortgage with monthly repayments at this level you could probably say that if this is affordable it’s money well spent, but what about negative equity?
A Google search will flag up that the biggest risk of a 100% mortgage is that the borrower is more likely to fall into negative equity, but is this risk as great as is emphasised?
The average house price would need to drop by around 5% for the 100% mortgage borrower to fall into negative equity, but had they not taken on the mortgage and continued to pay rent they would have paid over £90,000 in rent over the same period (assuming no rent increases which seems unlikely!) Plus it’s fixed for five years whereas rent isn’t, so it’s perhaps a question of relativity really. Yes, the possibility of negative equity exists, but after five years there may also be some inroad into the capital outstanding, albeit modest.
The Consumer Duty makes it incumbent on both lenders and brokers to provide an ongoing service to borrowers, and although not confirmed, it’s possible that The Skipton could offer a product transfer rate to these clients, so they should not effectively become mortgage prisoners and forced into paying regular standard variable rates. There are no guarantees of course.
So in conclusion, it remains as important as ever to point out the potential risks to any prospective borrower whilst providing enough information for them to make an informed decision. Informed decision being the point.
