The Skipton Building Society have just launched the UK’s first 100% mortgage exclusively for renters who are also first time buyers, aged 21 and over, and are not purchasing a new build flat. This blog aims to help outline how this scheme works and also some of the potential downsides.
Before the 2008 banking crisis, 100% mortgages (which do not require a deposit) were fairly commonplace with some lenders offering up to 125% of a property’s value. They have however disappeared from the mortgage market since 2008 when the issues highlighted by the financial crisis led to the tightening of mortgage rules for both lenders and borrowers.
This mortgage would appeal to those keen to get on the property ladder but who cannot afford to save up a 5% deposit and do not have access to financial support from their family.
It will also help people currently trapped in the private rented sector, where the average monthly costs keep soaring to new record highs.
The mortgage therefore provides credit for the fact that many tenants will have built up a strong track record of managing housing costs responsibly, but at the same time have found it difficult to save a deposit due to rising costs.
How it works
In order to apply for the Skipton mortgage there are a number of hoops that applicants for the new 100% deal will have to jump through.
Importantly, the monthly mortgage payment must be equal to or lower than the rent they are used to paying. So, tenants paying an average of £1,290 a month over the last six months will have a maximum monthly mortgage payment of £1,290, and this will also determine the maximum amount they can borrow.
Skipton require proof of 12 months rental and household bills payments being paid consistently as part of the process, with the 12 months of payment falling within the last 18 months.
Applicants also have to meet the standard mortgage affordability requirements and pass credit score checks, so it is important to have not missed any credit related payments in the last 6 months.
In an attempt to counter the potential volatility in the housing market in the coming months, the mortgage has been designed as a longer-term product – it is a 5 year fixed-rate deal – and the 5.49% interest rate is slightly above the current average new 5 year fixed-rate, which is around 5%.
Downsides
The main issue with the product is that it puts borrowers at risk of going into negative equity.
This is when the value of the property is lower than the mortgage amount outstanding, leaving borrowers trapped and unable to pay off their mortgage using the property proceeds should they wish to move.
The other issue is that the average rent varies in different parts of the country, so someone renting in the South West for example would not be able to borrow as much as someone renting in London and the South East as the mortgage payments cannot exceed the rent they have been paying.
It may therefore be more prudent to save a 5% deposit and borrow based on standard affordability using a borrower’s income to calculate how much can be borrowed, especially in areas of the country where rents are lower.
For example if your monthly rent is £750 then over 25 years Skipton’s calculator will allow you to borrow £123,000. On the other hand, if your rent is £1,250 per month then you can borrow £204,000 over the same term.
In summary
Although the scheme has its limitations, it does offer first time buyers with little or no deposit a means to enter property ownership. It may be the start of other lenders in the mortgage market following suit and opening up property ownership to more people who would otherwise be stuck in the rented sector.
It is always important however to discuss all options with a qualified mortgage adviser so that the most suitable mortgage can be recommended.
To find out more about how one of our independent mortgage advisers can help you, please contact us using our Facebook or Contact Us page, or call the office on 01329 282882 where one of our advisers will be happy to help.
Your home may be repossessed if you do not keep up repayments on your mortgage.