The return of the 100% mortgage has been in the news this week, and many of us will remember only too well the last time this type of mortgage hit the headlines.
As their name suggests, standard 100% mortgages enabled buyers to purchase a property without putting down a deposit. This type of mortgage was kicked into touch following the 2008 financial crisis, amid fears that falling house prices were pushing borrowers into negative equity, whereby the amount they owed on their mortgage was more than the value of their home.
However, 15 years on from the financial crisis, Skipton Building Society has just introduced a new ‘Track Record’ mortgage where it looks at a renter’s history of making rental payments and, provided they meet affordability criteria, they can access a mortgage without any deposit.
Here, we look at how the Skipton mortgage works, along with some of the pros and cons of opting for a 100% mortgage deal.
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How does Skipton’s Track Record mortgage work?
Skipton’s Track Record mortgage has been specifically designed for first-time buyers who are currently renting, and who can demonstrate a track record of being able to afford their monthly rent and other outgoings for a minimum of 12 months in the last 18-month period.
It is targeted at those who need to borrow 100% of the property value, although the building society says that if there is a deposit, they are happy to take it into account even if it’s gifted. However, if the deposit is greater than 5%, the Track Record mortgage won’t be suitable as it is aimed at those borrowing 95% or more.
The monthly mortgage payment must be equivalent to or less than than the average of the last six months rental cost. So for example, if the average rent over the last 6 months is £1,000, the mortgage payment must be £1,000 or lower. The mortgage is a five year fixed rate deal, fixed at 5.49%, and has no arrangement fee. This rate is higher than comparable five-year fixes, to reflect the higher risk of default for the lender.
Teddy Cenaj, mortgages expert at Rest Less Mortgages, said: “The increased accessibility to the property market through no-deposit options presents a considerable benefit to first time buyers. However, acquiring a home without a deposit introduces the possibility of negative equity, especially in the current market, which has experienced a decline in property values.
“For those planning to reside in their property for an extended duration, temporary fluctuations in value might not be significantly detrimental. Nevertheless, it is crucial to take into account the potential risks involved in purchasing a home without a deposit.
“Skipton’s no-deposit deal is an excellent offering tailored to assist individuals who have a proven history of timely rent and household bill payments, but struggle to accumulate a deposit due to the burden of high rental costs.”
Who’s eligible for the Skipton Track Record mortgage?
To qualify for the Track Record mortgage, applicants must be first-time buyers aged 21 or over.
They must have had no missed payments on any debts or credit commitments, such as their mobile phone bill, in the last six months, and will also need proof of having paid rent and other household expenses for at least 12 consecutive months within the last 18 months. Joint applicants who have been renting separate properties will be eligible, provided each applicant can demonstrate that they have individually covered their entire rental and household expenditure payments.
The maximum buyers can borrow is restricted to 4.49 x their income. So, for example, someone with a £30,000 salary would be able to borrow no more than £134,700, rising to £202,050 for someone earning £45,000 a year.
Our mortgage affordability calculator can help give you an idea of how much you might be able to borrow based on your income and outgoings. If you prefer to speak to someone – arrange to get expert mortgage advice from an experienced mortgage advisor.
The Track Record mortgage cannot be used to buy a new build home, and the maximum permitted loan amount is £600,000.
Do any other lenders offer 100% mortgages?
There are other mortgages available which allow first time buyers to borrow up to 100% of the property value, but these are typically guarantor mortgages, where a parent or grandparent signs up to cover the mortgage repayments if the child fails to meet these. Guarantors will typically need to provide some sort of security, such as their own home or savings, so could be putting their home at risk if their child fails to make repayments or defaults on the terms of their mortgage.
If you want to help your child or grandchild to get onto the property ladder, you can explore some of the options that might be available in our guide Nine ways to help your child buy a home.
What are the positives of 100% mortgages?
Thousands of renters are unable to get onto the property ladder despite often paying rent that costs them much more than a mortgage would, simply because they are unable to build up a big enough deposit to buy.
According to the latest Halifax House Price Index for April, even though prices have fallen slightly month on month, the average property in the UK now costs £286,896. This means that someone wanting to put down a 5% deposit would need to save up £14,345 – no mean feat given the current cost of living crisis.
The re-introduction of 100% mortgages would potentially enable those who struggle to save these enormous sums or who don’t have help from the Bank of Mum and Dad to get onto the property ladder.
What are the downsides of 100% mortgages?
The biggest downside of 100% mortgages, as previously mentioned, is that if property prices fall, homeowners will end up in a position of negative equity, where their property is worth less than the amount they owe.
This can cause big problems if you were hoping to sell your home or remortgage in the near future. For example, if you want to sell, and you are in negative equity, you’d have to make up the difference between the property’s value now and your mortgage. So for example, if your property was valued at £200,000 when you bought it, and your mortgage is for this amount, if its value subsequently falls to £170,000, you’d have to make up the £30,000 difference if you want to sell. This means most people who find themselves in a position of negative equity have no option but to stay put and hope that property prices recover in future.
You can find out more about negative equity in our guide What is negative equity and what can you do about it?
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