Since the 2007 financial crash, the property market has been in a constant state of flux where renters and first-time buyers saving for a deposit have found themselves turned away by the offer of highly unaffordable rates.
However, Skipton Building Society has launched its first no-deposit, 100% mortgage, and it is the first to launch in the UK since 2008. This type of mortgage could provide some much-needed relief to first-time buyers and offer them the step they need to make it onto the property ladder.
Let’s take a further look into what a no-deposit mortgage is, how it could help first-time buyers, the risks involved, and how speaking with an experienced mortgage broker can help you to navigate this new mortgage deal.
What is a 100% Mortgage and How Does It Work?
A 100% or no-deposit mortgage is exactly as it sounds, a mortgage you can obtain without saving for a deposit. It’s slightly more difficult to obtain than it sounds as there are criteria to pass as well as Skipton’s own affordability test to pass.
Skipton’s 100% mortgage is a five-year fixed mortgage, whereby you are charged the same interest rate of 5.49%, for a five-year period, much like other mortgages on the market of the same nature. The difference is you are not required to save for a deposit before applying.
Saving for a deposit is difficult when renting, so this mortgage was designed specifically to help renters, who have not previously owned a home before and who have paid their rent, in full and on time for at least 12 months.
Those that have saved for a deposit can also apply, but the deposit must be 5% or lower to be acknowledged. As you would imagine, there are premiums that come with not having a deposit and it still may be more beneficial to pull together a 5% deposit, but by doing this, you open yourself up to more five-year fixed deals at 95% loan-to-value ratio that are currently significantly cheaper.
How Does a 100% Mortgage Compare to Other Five-Year Fixed Mortgages?
If we look at Skipton’s 100% five-year fixed mortgage, it has an interest rate of 5.49% and no setup fees with a yearly cost of £22,080. If you can save a 5% deposit (95% LTV) this would drop your interest rate to 4.6% and although it would incur a £300 set-up fee, your yearly cost would also drop to £19,292*
Interest rates, set-up fees, and yearly costs drop further the lower your loan-to-value ratio, meaning that the more money you could save for a deposit, the cheaper mortgages are. So, if you have managed to save a small amount of money for a deposit, it may be worthwhile investigating another mortgage five-year fixed deal on the market.
What are the Criteria for a No Deposit Mortgage?
The number one criterion is that you must be a first-time buyer, who has paid their rent in full and on time for the past 12 months. If you have previously been a homeowner or have had trouble making rent payments on time, without a valid reason, then you may find it difficult to gain this no-deposit mortgage.
To gain this type of mortgage, you must:
- Be a first-time buyer.
- Be 21 or over to apply.
- Have been renting for at least 12 consecutive months out of 18 and have made all rental payments in this period on time.
- Have paid all household bills for at least 12 consecutive months out of 18 on time.
- Not have missed any other repayment commitments in the past 6 months, such as subscriptions and phone payments.
- Not looking to buy a new-build flat.
All these criteria will require proof and any defaults will show on your credit score, so it is important to keep this as up to date as possible, with info to back up potential defaults.
Monthly Rent vs. Borrowing
When it comes to borrowing with the no deposit mortgage, you are only able to borrow the equivalent or less than that what you currently pay in rent each month. So, if you pay £500 per month in rent, then the no-deposit mortgage wouldn’t cost you more than the equivalent of £500 a month either. This is different to normal mortgages, where your borrowings are based on income and outgoings and the lender's specific criteria.
Skipton’s 100% mortgage still needs to manage concerns on whether repayments can be made, so if your current rent is £1,000, there is no guarantee that you’ll be able to borrow the equivalent as you’ll still need to pass Skipton’s own affordability tests. The maximum Skipton’s is willing to lend on this mortgage is £600,000 but if they have concerns about your ability to pay then this figure will reduce.
What Risks Are Involved in a 100% Mortgage?
One of the biggest risks with any mortgage is falling into negative equity. This is when the value of your mortgage becomes more than the value of your house. If you were to take a mortgage out with a 10% deposit (a 90% mortgage) then property prices would need to drop further than 10% for you to fall into negative equity. However, with a 100% mortgage, the risk of falling into negative equity is much greater because house prices wouldn’t need to fall very far for this to happen.
Falling into negative equity can make it so much harder to remortgage and when the time comes, to move home, as there are very few mortgage deals currently available where your LTV is 95% or more. If you are unable to remortgage then you may end up trapped in your current deal, not able to switch to a cheaper one.
Overpaying & Portability
One saving grace for this mortgage is that like most fixed-rate deals, you are able to make overpayments of up to 10% a year, meaning that you can reduce the interest payment slightly quicker in the beginning and move on to repaying more of the capital. This will help to reduce the chance of falling into negative equity.
Skipton’s 100% mortgage is also portable, so if you were to move home, it’s possible to take the deal with you.
Speak to a Leading Mortgage Broker for Advice and Guidance.
We understand mortgages can be confusing, and trying to learn and understand a new type of mortgage and whether it’s right for you can leave you feeling overwhelmed, that is why we recommend chatting with our experienced mortgage advisors.
At TaylorMade, we have a wealth of experience in our field and our team of friendly mortgage brokers can take the intimidation out of understanding this new 100% mortgage and advise how and if it could work for you.
Give TaylorMade a call today and our helpful mortgage advisors will help you find the mortgage that is right for you.
