Buy your first property with no deposit as Skipton launches 100% Mortgages
Earlier this month, Skipton Building Society (Skipton) launched its 100% mortgages through their Track Record mortgage product. This is a new and innovative product helping first-time buyers get on to the property ladder and purchase their first property with no deposit. Essentially, the lender will pay to purchase the entire property for you, subject to approval.
Skipton is the first to launch a product like this since the financial crash in 2008. Before then, similar products were widely available. However, since the crash lenders have been more cautious, deeming such products to be high risk and applying stricter requirements. Therefore, lenders who offer 100% mortgages often require guarantors along with various other conditions.
What is the 100% mortgage and how does it work?
Skipton has a dedicated website containing detailed information about the product. However, to summarise: the 100% mortgage product means that a first-time buyer is able to borrow all of the mortgage amount instead of putting down the usual five or ten percent deposit (the latter being more common, but five percent is not unusual). Typically, the lower the deposit the higher the interest rate is. Nevertheless, with the 100% mortgage Skipton provides a fixed rate of 5.49% for five years. This means that despite the changes in the Bank of England base rate (whether it goes up or down) the rate at which the first-time buyer pays back the mortgage is fixed and will not change until the five year period ends.
How does this differ from a ‘traditional’ mortgage product?
By traditional, we mean the most common mortgage products where a borrower puts down a certain amount of deposit and borrowers the rest by way of a mortgage. For example, if a first-time buyer purchases a property for £500,000, they will most likely put down a 10% deposit of £50,000. The remaining amount of £450,000 is then borrowed via the mortgage. To borrow this amount, the mortgage applicant(s) must have a gross income of approximately £112,500 as most lenders will typically loan up to 4 times your salary.
Depending on the lender, the term, and length of the product the interest rate will be set accordingly. For instance, the average interest rate for a five-year fixed term is 4.30%. Skipton’s fixed rate of 5.49% is considerably higher because of the risk of default.
Each borrower is expected to make monthly mortgage repayments to their lender and that amount very much depends on the sum borrowed and the interest rate applied. Taking the example above, if you borrowed £450,000 for five years at 4.30% for a 25-year term, the repayment is likely to be around £1,612.50 per month. In comparison, the 100% mortgage repayments are likely to be £2,058.75. The main difference is that the first-time buyer does not have to save for a deposit, therefore justifiably the monthly payments will be higher, as is the interest rate.
Do I qualify for the Track Record Mortgage?
Skipton are offering the 100% mortgage to customers who have a proven track record of renting. Therefore, the applicant(s) must be paying the rent and bills for the rented property at which they reside for at least 12 months before applying. The practical issue is that most first-time buyers cannot afford to rent (particularly in London) consequently, they live at home with parents, family, or friends. The full eligibility criteria can be found on Skipton’s website but in summary:
- The applicant(s) must be a first-time buyer aged over 21
- The applicant(s) must have a deposit of less than 5%
- The applicant(s) must not have any missed payments on debts/credit commitments (such as a phone bill) in the last 6 months
- The applicant(s) can only borrow up to £600,000
- The property cannot be a new built flat (but new build houses are acceptable)
- The applicant(s) must have experience and proof of paying rent for a minimum of 12 months in the last 18 months as well utility bills and council tax.
- The applicant(s) must meet the household-to-household criteria as set out by Skipton, namely meaning the applicant(s) applying for the mortgage must be the same people who are renting and paying for the rent and household bills.
Applicants who wish to apply alone must prove that they have paid the rental and household expenditure entirely by themselves for 12 consecutive months within the last 18 months. Joint applicants can also apply (maximum 4 per application) and will have to provide evidence of making such payments.
In order to be successful, the applicant(s) must pass Skipton’s criteria and the credit check. You may not be approved for the mortgage if you are in debt or have a bad credit score.
You will not be eligible if your current rent averaged over the last 6 months is lower than the new monthly mortgage payment indicated by the Track Record Calculator. The amount you are borrowing must be equal to the value of the entire property and the monthly payments must be the same or less than the rental payments. For instance, if you pay £2,000 a month for rent your Skipton 100% mortgage repayment must be equivalent to this amount.
What are the advantages and risks?
- Helps renters to buy a home without having to save for a deposit
- No requirement to get a guarantor’s backing
- Provides renters with easier access to the property market
- Allows first-time buyers to gain equity in a property by repaying the debt
- Fixed interest rate for five years despite economic turbulence
- Aimed at renters only who have high income and who can afford paying high rent
- Does not help first-time buyers living at home with family or friends
- Greater risk of negative equity if prices fall as none of the property value is owned
- Limited product with only one lender offering it so it does not offer much flexibility
- Obtaining approval is likely to be difficult due to the strict requirements
- More expensive as interest rates are higher
Are there alternatives?
The average property price in the UK is valued at £278,436 but in London it is considerable higher with the average being £523,666. Therefore, depending on the area in which you wish to buy, this mortgage product may not be able to offer the amount that you require.
There are various other mortgage products available for first-time buyers including 100% mortgages (which require a guarantor) from lenders such as Barclays Bank and Kent Reliance.
Article written by:
Forida Khatun – Solicitor (Residential Property)
Neve Lehrian – Paralegal (Residential Property)