Brits are being offered no-deposit 100% mortgage loans

LONDON — Renters in the U.K. will be able to borrow up to 100% of the value of a property without a guarantor or deposit in a new mortgage plan introduced by Skipton Building Society.

A building society is a British financial institution that provides banking services for, and is owned by, its members. The new mortgage product, aimed at first-time buyers who are currently renting, has a fixed rate of 5.49% for five years, over a maximum term of 35 years.

The average five-year rate was 5% in March, according to the Moneyfacts UK Mortgage Trends Treasury Report, across all loan-to-value ratios. Buyers typically get a 5.33% mortgage rate on 95% LTVs, according to the report, but the majority of buyers opt for a lower rate.

A number of banks, including NatWest, Santander and Nationwide, introduced 95% mortgages in April and May 2021 after the British government announced a new mortgage guarantee program encouraging high loan-to-value lending to enable more first-time buyers to get onto the property ladder post-pandemic.

The new Skipton deal is widely reported to be the first time a mortgage lender has offered 100% mortgage products since 2008, when some building societies offered rates of up to 125%. Many of the products were then pulled from the market as the country fell into financial crisis.

In a press release, Skipton said it would ensure monthly mortgage payments for each applicant are not more than the average of their last six months’ worth of rental costs.

The offer is only available to first-time buyers, and is subject to affordability and applicants’ credit scores, as well as a good track record of rental payments over at least 12 months.

Skipton has described the move as “a lifeline to tenants … to help them break out of their trapped rental cycles and onto the property ladder for the first time.”

Charlotte Harrison, CEO of home financing at Skipton, said people being unable to get onto the property ladder is “having a massive impact on the fabric of our society.”

“We recognise there’s a clear gap in the market for people who have a strong history of making rental payments over a period of time so can evidence affordability of a mortgage,” Harrison said in a press release.

According to research carried out by Skipton, 35% of renters are struggling to save due to increased rental costs.

The move could be “just what is needed” for some borrowers, according to Rita Kohli, managing director at mortgage advice service The Mortgage Shop, but there are concerns about launching this kind of product in an environment where house prices could continue to fall.

“[This] means that, as advisers, we will need to make sure clients understand the risk of negative equity very clearly,” Kohli said in a research note.

There is “grave danger” that borrowers will “overextend themselves” with this kind of product, Graham Cox, founder at mortgage advice service Self Employed Mortgage Hub said in a note.

“The slightest fall in house prices … will leave homeowners in negative equity, with the property worth less than the mortgage balance,” Cox said. “Not a great place to be if your income drops and you need to sell,” he added.

To prevent customers falling into negative equity, stress tests will need to be particularly rigorous, Senior Economist at Capital Economics Andrew Wishart told CNBC.

“That will mean that the maximum people can borrow could be less than with other mortgages, meaning that the gap between the house price the buyer aspires to purchase and the amount they can borrow is particularly large,” Wishart said.

There is also the question of whether there is a larger structural problem in the British housing market, with there being a “severe shortage” of properties available for first-time buyers, Jonathan Long, head of corporate real estate at wealth management firm Investec, told CNBC.