Are 100% mortgages the answer?

10 May, 2023 (London) – Renters in the UK are facing the triple problem of increasing rental prices, double-digit inflation and dwindling financing options to get onto the housing ladder.

In recent years, the cost of renting in the UK has been on the rise. According to a survey conducted by Keyzy, a homeownership solution for first-time buyers, 78% of respondents had their rent increased in the past 12 months. The average rental increase was £195, or 20% on average, with the biggest rental increases reported in Birmingham. London-based respondents surveyed by Keyzy reported an average rental increase of 12% in the past year. This is putting a strain on many UK households, as they spend a larger proportion of their incomes on rent.

With house prices still at historic highs and wages not keeping up with inflation (average wage increases were 3% below inflation in 2022), many people are finding it difficult to save up a large enough deposit. This is especially true for young people, who are often on lower incomes than older generations. With fewer financing options available due to economic uncertainty, the gap between what is needed to buy a home and what is possible to borrow is increasing.

A building society, Skipton, launched what it called an “industry first” mortgage that doesn’t require a deposit. This is reportedly the first 100% mortgage to launch since the financial crisis of 2008.

Providing 100% mortgages, where borrowers can finance the entire purchase price of a property without any deposit, can carry several potential risks in the UK. As borrowers have no equity or personal investment in the property, they may end up owing more on the mortgage than the value of the property, resulting in negative equity and potential financial difficulties.

Additionally, without equity in their homes, borrowers may face difficulties refinancing their mortgages or switching lenders. This lack of flexibility can limit their ability to find better interest rates or loan terms in the future.

This is not to say that there won’t be potential first-time buyers out there who can benefit from this product. For those with stable incomes, good track records and no deposit, this may be just the thing that helps them on the property ladder. There is also potential for property price increases, in which case these customers would see their equity grow alongside their mortgage repayments.

On his website Money Saving Expert, Martin Lewis expressed cautious support for this new product saying: “So Skipton Building Society's criteria of requiring a good rental track record to prove someone can make mortgage payments is sensible, and so I cautiously welcome it, done carefully, after advice, as an option for some”.

It is unclear how many prospective homeowners Skipton will be able to help given the budgets they offer for renters. Borrowing amounts are capped so that your monthly payments will never exceed what you’re paying for your current rental. This means that those living well within their means on an attractive rental agreement might not be able to get anywhere near the amount they need to buy a home in their area. There are also those who might be living at home to save money or splitting rent with flatmates that could miss out.

Time will tell how much impact a 100% mortgage will have on breaking the deadlock with first-time buyers, and we should expect to see more players entering the market with similar offerings. Either way, we can’t expect this to be the full story for those wanting to transition from renting to buying.

Policy Exchange, the UK think tank produced a report on first-time buyers last year that outlined the challenges faced by first-time buyers in getting onto the property ladder. The authors recommended that government “facilitate the market in providing the solution to Generation Rent becoming Generation Buy”.

Some of the current solutions for First Time Buyers mentioned by the report currently provide ways for renters to become homeowners. These include government programmes like the mortgage guarantee scheme and private rent-to-own solutions like Keyzy that do not require a deposit.

Both major political parties announced their pledges to be the party of home ownership in the next election cycle. However, details are scarce on what these pledges mean from a policy, regulation and funding perspective. For now, it’s really a case of waiting to see what could materialise as the campaigns for government heat up.

Even without the detail of new government ideas, the introduction of 100% mortgages from Skipton Building Society alongside other zero deposit solutions like Keyzy and shared ownership schemes are creating more options for Generation Rent to break the renting cycle. By taking advantage of solutions like these, renters can finally achieve the stability and security that comes with owning their own home.