Tenants struggling to get a foot on the property ladder amid soaring rent prices may be pleased to hear that Skipton Building Society is planning to launch a new zero deposit mortgage – the first deal of its kind since the 2008 financial crash.
But while news of the scheme has been welcomed by many analysts, it can come with its own risks, an expert has warned.
Nigel Purve, co-founder and CEO of Wayhome, said: “Although the re-introduction of 100 percent mortgages will no doubt be welcomed by those struggling with the high cost of homeownership, it’s important that anyone considering such a product fully understands the approval process they will be subject to.
“While the concept of purchasing a home without a deposit is attractive, the income multiplier associated with mortgages would still limit the purchasing power of those with lower incomes.”
Mr Purve continued: “What’s more, there’s a very real risk of buyers falling into negative equity should property values start to fall. Given the unsettled market conditions seen in recent months, such a change in the market is far from out of the question and could see buyers lumbered with their property and unable to remortgage until such a time that market values recover.”
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Mr Purve said he thought that people who are “truly serious” about solving the housing crisis should look at other approaches to solve the problem in a sustainable way that is accessible to other people – “rather than loading people up with more debt and negative equity risk”.
The new Skipton BS loan is a five-year fixed-rate mortgage and does not require a guarantor and is only for people currently renting a property.
To be eligible, renters must provide evidence of affordability for a mortgage and have a good history of making rental payments.
If successful, SBS will provide 100 percent of the property value on a five-year fixed-term mortgage. However, the scheme will charge homeowners a 5.49 percent interest rate, which is more expensive than the average five-year fix of five percent.
Simon Bath, CEO and founder of iPlace Global, said: “Whilst more support is needed for generation rent, I remain wary that interest levels are higher on this mortgage deal which will make it unaffordable for some.
“It’s also important to remember that we saw a rise in riskier mortgages with a high loan-to-value more than a decade ago which was a root cause of the 2008 financial crash.”
However, Mr Bath added: “As long as affordability tests are stringent, this may provide many in generation rent with a much-needed avenue to finally escape onto the property ladder.”
Express.co.uk has contacted Skipton Building Society asking for comment.
Paul Donoghue, CEO at Concept Financial Services, echoed the sentiment, stating: “Providing an option for rent-trapped clients can only be a positive move in the current market.
“With the exponential rise in rents, it will give some deposit-strapped tenants the option to seriously look at the opportunity to purchase a property.
“It makes perfect sense if the level of the mortgage payment is below their current rental commitment and they have a proven track record. It also provides a real alternative to shared ownership that has its disadvantages and still incurs a monthly rental.”
Kylie-Ann Gatecliffe, director at KAG Financial said that while negative equity “needs to be discussed”, the longer length of the mortgage term could help reduce the risk.
Ms Gatecliffe said: “While many people will have flashbacks to the Northern Rock days, we all know that back then mortgages were handed out like sweets.
“Today, underwriting is much more in-depth with affordability checks also far more robust. For those stuck renting with rising costs, it can feel like an uphill battle trying to save, so Skipton launching this is exactly what the market needed.
“Whilst the fear of negative equity will need to be discussed, given that this is a five-year product it will encourage people to not look at this as a short-term option, which will ensure the house value has a reasonable amount of time to grow to build equity.”
