New mortgage deals rarely make front-page news, but Skipton Building Society created headlines in May with its 100% mortgage, which is aimed at helping long-term renters onto the property ladder.

It is perhaps not surprising the product caused a stir. As London & Country associate director David Hollingworth points out, it is the first 100% mortgage product since the 2008 financial crisis.

Hollingworth says there are other deposit-free options for first-time buyers (FTBs), but all rely on family backing, via cash locked up in a separate savings account or collateral in the form of spare equity on the parental home. Barclays’ Family Springboard Mortgage and ‘family assist’ products from Buckinghamshire, Tipton and Loughborough building societies work along these lines.

There are not many situations in the Southeast where Skipton’s 100% mortgage works

“Skipton’s deal is different,” says Hollingworth. “It’s based on the affordability of the borrower without additional back-up from a parent, or any deposit buffer for the lender.”

Skipton’s 100% mortgage is likely to prompt other lenders to come back into this market, he says.

But Hollingworth does not predict an immediate “flood of copycat products”; he expects rivals to wait and gauge demand.

Trinity Financial product and communications director Aaron Strutt welcomes the move from Skipton.

“Coming back into the no-deposit sector after such a long time is a brave move,” he says.

In the current climate I don’t believe it’s the right time for this type of product

Although the product remains “niche”, he adds, “other lenders will be looking at Skipton’s rate and working out if they should be entering this market.”

Complications for borrowers

One key feature of this new product is its ability to take rental payments into account when checking affordability.

Mortgages for Business head of residential Neil Bishop says he is unaware of other lenders taking this step, despite demand from would-be FTBs.

“It’s definitely innovative and, although it sounds a good thing for clients, they need to be aware of how this might restrict borrowing,” observes Bishop.

If all lenders’ algorithms had built-in reliable rental payments, things would change

He points out that under Skipton’s product terms the maximum a client can borrow is based on current monthly rental payments.

“This means, before any affordability check, there’s already a maximum loan amount, which could mean their ideal home is no longer affordable.”

Private Finance technical director Chris Sykes says Skipton essentially is applying two affordability calculators: one based on rental payments; and then a standard affordability check to ensure borrowers can support this level of debt, which will take into account the usual checks and balances on income and outgoings, with a maximum multiple of 4.49 times income.

Sykes says this can lead to a situation where, from an affordability standpoint, a potential FTB could borrow up to £450,000 on normal income calculations. However, if they have been paying rent of, say, £1,600 a month, this gives a maximum loan of only £300,000.

100% mortgages don’t improve affordability. In fact, borrowers will be borrowing less to mitigate the risk of little or no deposit

He adds: “Others will have the inverse problem of paying a high rental that may enable them to borrow £350,000 — but their income may not allow them to borrow this amount.

“From what I have seen there are not many situations in the Southeast where Skipton’s 100% mortgage works, but plenty of areas in the North where it does.”

These complications highlight the important role brokers play in helping FTBs to source the best loan, and in weighing up the pros and cons of this deal against ‘family assist’ products and other FTB deals, such as Nationwide’s Helping Hand mortgage at 95% LTV.

Creating new problems

Skipton’s new product extends the options available for brokers when advising FTBs and could spur more 100% deals.

It’s crucial to ensure that proper checks and balances are in place. If not, we might be setting the stage for a wave of legal issues reminiscent of PPI

But there are concerns that, rather than solving current affordability issues, it creates potential new problems in the market, particularly in relation to negative equity. This seems pertinent as some forecasters predict falling house prices in the near term.

Bishop says: “This is a problem and is one of the reasons why this product has made headlines.

“While I believe the housing market is currently stable, you never know what is around the corner, especially with the ongoing issues around the cost of living.”

Bishop adds it is important that the dangers around negative equity are fully explained to FTBs to help mitigate these risks.

The Mortgage Stop operations director Rohit Kohli says: “The timing of this mortgage [from Skipton] coincides with rising interest rates and a dip in property values, increasing the risk of negative equity.

Skipton isn’t trying to solve the housing crisis — just to help those paying high rent

“With the Consumer Duty weeks away, it’s crucial to ensure that proper checks and balances are in place. If not, we might be setting the stage for a wave of legal issues reminiscent of PPI [payment protection insurance].”

However, Hollingworth points out that, although no-deposit mortgages increase the risk of negative equity if prices fall, this is less of a problem if repayments remain affordable.

He adds that Skipton’s product is available only as a five-year fix, which will help mitigate against shorter-term price fluctuations.

Structural reform

Although the housing market looks fragile at present, Hollingworth says renting lacks the same security of tenure. In addition, aspiring FTBs who are trying to save a deposit may find themselves in a worse financial position if prices continue to climb.

Before any affordability check, there’s already a maximum loan amount, which could mean the borrower’s ideal home is no longer affordable

Of more concern among brokers is whether this new 100% product addresses the fundamental affordability issues faced by many FTBs.

EHF Mortgages managing director Justin Moy says: “100% mortgages don’t improve affordability. In fact, borrowers will be borrowing less to mitigate the risk of little or no deposit.”

Self Employed Mortgage Hub founder Graham Cox describes 100% mortgages as a “futile attempt to address the symptom rather than the underlying cause that rents and house prices are too high”. He says these loans, like Help to Buy, could simply exacerbate the problem by pushing up property prices and further reducing affordability.

Most brokers agree that the plight of FTBs will not be substantially improved until there is more fundamental structural reform, whereby far more new homes are built. However, although many successive housing ministers have promised this, few have delivered in recent decades.

Coming back into the no-deposit sector after such a long time is a brave move

Until it is achieved, says House and Holiday Home Mortgages director Mark Stallard, more product innovation and fresh ideas around regulation could help at least some FTBs to get on the property ladder.

“Skipton isn’t trying to solve the housing crisis — just to help those paying high rent who couldn’t save for a deposit.”

Better use of technology could further widen access, he says.

“If all lenders’ algorithms had built-in reliable rental payments, things would change. We’re not seeing others like this yet, but we expect lenders to bring in variants.”

‘Rock-solid’ focus

Although the Bank of England has removed the requirement to stress test income levels at 3 percentage points above the revert rate, brokers point out that affordability checks remain much more robust than in 2008 — when 100% mortgages were more commonplace.

While I believe the housing market is currently stable, you never know what is around the corner

Hollingworth says: “It would make sense for there to be a ‘rock solid’ focus on affordability, which may prevent 100% mortgages becoming a mass-market product.”

Bishop adds: “The lessons we can learn from the past are clear: 100% mortgages can quickly become an issue if property prices start to decline.

“I don’t believe we’re heading towards another 2008 scenario, but in the current climate I don’t believe it’s the right time for this type of product to enter the market.”

This article featured in the June 2023 edition of MS.

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