With hindsight, one of Britain’s biggest building societies could definitely have picked a better day to launch a first-of-its-kind 100% mortgage.
On Tuesday morning, just as the press release was being sent out and Skipton building society boss Stuart Haire was preparing for his BBC Radio 4 Today programme interview, the Halifax reported that average UK house prices fell in April, by 0.3% month on month, and that “we should expect some further downward pressure on house prices over the course of this year”. To add to the gloom, the struggling online estate agent Purplebricks reported a further worsening in trading, there was a profit warning from another firm reliant on the housing sector, and many housebuilders saw their share prices fall.
The Skipton’s new mortgage is the UK’s first 100% home loan exclusively for renters. It has been described by some commentators as a “revolutionary” way to help people off the high rents treadmill and into homeownership, and by others as not too dissimilar to the risky loans that contributed to the 2007-08 financial crash.
Wherever you stand, Tuesday’s wave of negative housing market news throws the spotlight on the elephant in the room with this type of deal: even a small fall in house prices going forward will put those who sign up into negative equity, where people are trapped in properties worth less than their mortgages.
To be fair to the Skipton, it has structured its new deal in a way that addresses at least some of the risks. Standard home loans where the borrower does not have to put down a deposit used to be fairly commonplace – there were deals that let you borrow up to 125% of a property’s value – but the last was axed in 2008. The financial crisis ushered in a clampdown on easy credit and lax lending and led to much tighter rules on who can get mortgages and how much they can borrow.
There are a lot of hoops that applicants for the new 100% deal will have to jump through. Notably, 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.
Applicants also have to meet the standard mortgage affordability requirements and pass credit score checks. In an attempt to iron out potential volatility, the mortgage has been designed as a longer-term product – it is a five-year fixed-rate deal - and the 5.49% interest rate is pricier than the current average new five-year fixed-rate, which is about 5%.
This mortgage could certainly appeal to those keen to get on the property ladder but who cannot afford to save up a five-figure deposit and do not have access to “family money”. It may prompt other banks and building societies to look at launching products to help people trapped in the private rented sector, where the average monthly costs keep soaring to new record highs.
Most mortgage brokers were reasonably or very positive about the new deal. David Hollingworth, an associate director at the broker firm L&C Mortgages, said it “offers a measured approach that gives credit for the fact that many tenants will have built up a strong track record of managing their housing costs responsibly”.
However, some commentators raised red flags about the risks. Graham Cox, founder of the Bristol-based broker Self Employed Mortgage Hub, said he was “amazed” that regulators had given Skipton the go-ahead to launch the product.
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“It’s like we’ve learnt nothing from the global financial crisis … The grave danger is that borrowers will overextend themselves. The slightest fall in house prices – and I believe they’ll fall significantly over the next 12-18 months – will leave homeowners in negative equity. Not a great place to be if your income drops and you need to sell,” he added.
Of course, a great deal depends on what happens to the housing market going forward. There’s no agreement even on how it is faring right now: while the Halifax said property prices fell last month following three consecutive months of growth, rival Nationwide said they rose in April (by 0.5%) after seven months of declines, suggesting “tentative signs of a recovery”.
However, an interest rate rise by the Bank of England on Thursday this week, which is widely anticipated and would be the 12th in a row, would clearly pile more pressure on many would-be buyers.
