A mortgage expert is warning renters tempted by news that the Skipton Building Society has launched a 100 per cent mortgage product - the first of its kind since 2008.
Brean Home, the personal finance expert at financial service NerdWallet, says such products come with long-term financial risks that could be disastrous for prospective buyers.
Home cautions: “Housing affordability is a big barrier to homeownership for many prospective buyers. In 2022 full-time employees in England and Wales could expect to pay 8.3 and 6.2 times their annual earnings respectively on buying a home.
“Inflated house prices have hit home ownership for younger buyers especially hard over the last 20 years. In 2017 35 per cent of 25 to 34 year olds owned a home, down from 55 per cent in 1997.
“Instead, there has been an increase in those renting homes. Around 20.3 per cent of people privately rented their accommodation in 2021 compared to 16.7 per cent in 2011.And a rising number are continuing to live with their parents.
“The 100 per cent mortgage aimed at helping renters get onto the property ladder joins a handful of other providers in offering low-deposit mortgage products to help first-time buyers purchase their first home. But, while low-deposit mortgages reduce the challenge of saving up for a mortgage deposit, they come with long-term financial risks that could be disastrous for prospective buyers.”
Home warns that higher loan-to-value mortgages are seen as more high risk by lenders, and as such often pay higher interest rates, which could further increase the financial burden on buyers should rates keep rising. It also increases the risk of negative equity which may limit buyers ability to sell in the future. Negative equity also makes it more difficult to remortgage and could leave buyers trapped on costly variable-rate deals.
“Despite a recent relaxation of lenders’ rules - which remove the requirement to test whether prospective buyers could still afford mortgage repayments if the standard average rate increased by three per cent - today's typical house prices are considerably more than this income ratio.
“Although homeownership remains a top financial aspiration for many, there isn’t a magic bullet solution available. So buyers need to weigh up the long-term financial risks and rewards of any mortgage product and it’s always worth considering alternative routes to homeownership.
“For example, guarantor mortgages may also offer a viable option for buyers with someone available to cosign their home loan. Government schemes such as Shared Ownership, First Homes and Rent to Buy may offer more suitable home-buying options depending on your financial circumstances.
“In some cases, it may be worth taking a little more time to save up a larger deposit and build up your credit score to help unlock more competitive deals and interest rates.”
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As long as people understand both the plus and minus points of high LTV mortgages and homeownership there's not really a problem.
Plus points:
You can buy whatever a mortgage lender says you can afford.
You can decorate it any way you want.
You can live in it as long as you keep paying the mortgage.
You can keep whatever pets you want as long as it isn't leasehold.
If interest rates drop your mortgage will become cheaper.
Minus points:
If interest rates rise your mortgage will become more expensive. There is no link between interest rate rises and wage rises.
Due to income multiples the property you can afford to buy is nowhere near as good as the property you can afford to rent.
If you need to move selling takes time and is expensive.
Insurance and maintenance are additional costs.
If your income drops there is no equivalent to Housing Benefit.
If you don't pay your mortgage the lender will evict you and sell the house as quickly as possible for a low price. Maybe not as much as the mortgaged amount so you will still have a debt.
If house prices drop you will owe the lender more than the house is worth (negative equity), which makes selling or remortgaging extremely difficult.
Having said all that if you buy the right property in a location you are happy with and can prioritise your mortgage payments over luxuries (such as food, car, holidays, social life), the likelihood is that it will all come good in the fullness of time.
I bought a house in 1991 on a 95% LTV mortgage and spent the entire 1990s in negative equity. We lived in it for 8 years and still own it. It's been a student HMO since 1999. In hindsight I can say it was one of the best investments I've ever made, even with the experience of negative equity, although it may not have felt like it at the time.
In 1999 we bought a renovation project with a self cert mortgage (marvelous product). That was what really kick started things. Self cert made just about anything possible.
Exactly the same Jo, spent a few years in negative equity however self cert products really got me going with housing and funnily enough quite a few of my mortgages was with the Skipton.
Self cert was a terrible product. This was a large part of the problem with the financial meltdown in 2008. Many self cert mortgagees would have been dead in the water if interest rates had not been reduced to near zero rates.
Happy that it worked out for you as maybe you didn't push it too far, but so little regulation was madness!
Andy, it was not a terrible product.
It was the greedy brokers and wholesale bankers that screwed it. Companies like the Skipton made me jump through hoops to prove I could pay for my house. So they did due diligence and it worked for both parties.
Good go buy your own you’ll have 30 years to pay for it, if won’t make much difference to them whether they go bust renting from the big boys £2’200. pm for a one bedroom Flat in Greenford outer London or buying their own.
They never have it so good until Mr Michael Gove poked his nose in after being sacked by previous Prime Minister unfortunately he was reinstated by Rishi Sunak his first big mistake after taking Office, who decided to destroy Tenants lives with Renters Reform Bill.
I also started out with a 100% mortgage and rates went up to over 15%. I took a second job, and a lodger and did without holidays (and without a car) for a few years. All second hand furniture. It was hard but there was a goal in sight. Few young people are prepared to make that kind of sacrifice to own their own home nowadays.
Shared ownership worked for two of our children but that has it plus and minus points too
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