A new no-deposit mortgage targeted specifically at renters has been launched by one of the country’s biggest building societies.
Skipton Building Society has announced it will allow people to access the deal so long as they have 12 months of on-time rental payments and a good credit score. There are already several deposit-free mortgages on the market. But what makes this one different is that it requires no guarantor - i.e. the financial backing of a family member or friend.
It is the first time in 15 years that such a deal has been made available to UK consumers. 100% mortgages, which tend to be riskier for lenders as there are circumstances in which the borrower may struggle to pay the loan back, were one of the key factors behind the 2008 financial crisis.
The deal comes as prospective homebuyers across the country continue to face an affordability crisis brought on by soaring inflation and soaring interest rates. The Bank of England is likely to hike its base rate again on Thursday (11 May), which could add hundreds of pounds a year to some mortgage products.
Cost of living pressures have coincided with near-record house prices. Despite average property values tumbling in the wake of the economic uncertainty caused by Liz Truss’s Mini Budget, they remain well-above pre-Covid levels.
So, how does Skipton Building Society’s new mortgage product work - and what are its positives and negatives?
Who is eligible for the Skipton deposit-free mortgage?
Skipton Building Society’s new mortgage product, which is called ‘Track Record’ is designed for people who are renting and cannot afford to raise a deposit. To be eligible, you have to:
- Be a first-time buyer
- Be aged 21 or over
- Have proof of paying rent on time for at least 12 months in a row during the last 18 months
- Have experience of paying household bills (e.g. energy bills and council tax) for the same time period
- Have less than a 5% deposit
- Have no missed payments on debts or credit commitments (e.g. a mobile phone contract) over the last six months
- Need to borrow no more than £600,000
- Not be looking at a new-build flat
If your application is successful, you will be tied in to a fixed rate of 5.49% for five years. The maximum term you can apply for is 35 years.
Using Skipton’s mortgage calculator, NationalWorld has worked out that a person who pays the average UK calendar month room rent of £683 (according to letting site SpareRoom) and wants to sign up for the 35 year term could borrow more than £127,300 with this mortgage product. Should you be paying the London average (£952), you could borrow almost £177,500.
Meanwhile, someone borrowing for the average rent on a first-time buyer home (£1,120 per calendar month), would be able to get a loan of £208,800 from Skipton. Rents have increased sharply over the last few months as a result of low stock. Landlords have been quitting the lettings market in large numbers as a result of major increases in mortgage costs and new government legislation.
The building society has pledged that successful applicants will pay no more in mortgage repayments than they do in rent. Charlotte Harrison, chief executive of home financing at Skipton, said: “We need to tackle the UK’s housing affordability crisis to enable more people, especially renters who are trapped in renting cycles, to buy their first home.
“People trapped in renting is one of the UK’s biggest housing challenges, having a massive impact on the fabric of our society. With escalating rents and the cost-of-living squeeze further impacting people’s ability to save for a house deposit, it’s making it almost impossible for people to get onto the property ladder.”
She added: “It is time for a rethink on these massive barriers to home ownership.” Ms Harrison said the mortgage “has been carefully created with the challenges generation rent is facing in mind, together with the potential risks and challenges they may encounter in the future too”.
Is the Skipton deposit-free mortgage a good deal?
There are several pros and cons with the mortgage being offered by Skipton Building Society. In the first instance, NationalWorld would recommend seeking out a mortgage broker who can advise you on whether it is the right kind of product for you. Here are the pros and cons of the ‘Track Record’ product.
We thought we’d begin with the negative aspects of the product as we see them. First, there are question marks over whether the loan you will be able to access will be enough to secure you a first-time buyer home.
Rightmove’s House Price Index, which tracks asking prices of typical first-time buyer properties, recently found that these sorts of homes cost £224,963 on average across England, Scotland and Wales.
Given you would have to be paying London levels of rent and on the longest mortgage term possible to be able to borrow anything close to this figure (and even then, you would still be some way short), Skipton’s mortgage might only benefit a small number of people.
Another thing to note is the rate of interest. At 5.49%, the product is more expensive than five-year fixes for those with a lower loan-to-value (LTV) ratio (the average five-year fix with a 75% LTV is 4.78%, according to comparison site Uswitch).
Given the unpredictability of the inflation crisis the UK’s currently facing, there are no guarantees that interest rates will go far below their current rate of 4.25% over the next two years. But most forecasts project they will have fallen back towards pre-cost of living crisis levels within five years. So, this mortgage could see you paying more for longer.
There is also a risk you could enter negative equity if the housing market sees anything amounting to a market downturn. Given the UK economy is in an uncertain position, such an event is possible.
The greater the deposit you put down for a home, the less likely it is that the amount you borrow through a mortgage will become greater than the value of the home itself - i.e. negative equity. But without the buffer of a deposit, negative equity becomes much more likely. It is only a problem if you’re remortgaging or looking to move, so the five-year term of the mortgage product should act as a safeguard against any minor price drops.
There are several positives about the ‘Track Record’ mortgage from Skipton. The key plus is that it could allow you to get on the housing ladder and pay towards your own asset rather than rent.
To be able to access most mortgages available on the market, you have to accumulate a five-figure deposit - something which is simply not possible if you’re pouring a significant proportion of your income into rent. It has also become much harder over the last 12 months given inflation has been eroding the value of money at a rapid rate.
So, Skipton’s offering could open up the housing market to people who would otherwise have to wait for several years to put together a sufficient deposit.
Another good thing about the deal is Skipton’s pledge that it will not set borrowers a repayment rate above their current rent level. It is unclear how the building society will achieve this aim. But if it manages to do so, it should mean you will end up paying less than you would have had to if you continued renting over the term of the mortgage.
Rents have been rising rapidly over the last year. With no solution in sight to the issues facing the sector (like low stock and high buy-to-let mortgages for landlords), it appears as if this trend may continue for some time yet.
Experts’ reactions to Skipton Building Society’s new mortgage product has been mixed - although this is partly due to the fact that we do not yet currently know how it works in practice in what is currently a highly unpredictable housing market.
Rachel Springall, a finance expert at the website Moneyfacts, said there would need to be systemic changes to the housing market for the affordability situation to improve for first-time buyers. She said “It is great to see more support for first-time buyers who are struggling to afford a deposit for a mortgage. There are very few 100% LTV mortgages in the market, but even if we were to see more innovative deals surface, affordable housing is very much in short supply, and there need to be significant changes to the market to turn this around.
“There are a few deals that will help first-time buyers get on to the property ladder with family assistance, such as the Barclays’ ‘springboard’ mortgage – however, its vital applicants and family members ensure they understand the arrangement before they commit. It is imperative borrowers compare the overall true cost of a deal and attempt to save on the upfront cost if they have used up most of their savings on a deposit, legal fees, or moving costs.”
Andrew Montlake, managing director of mortgage broker Coreco, said: “There are many potential buyers who have proved they can afford to pay rent at the current high levels, but just do not have the means to meet ever-increasing deposit levels and feel constantly at the mercy of rising rents.
“Whilst I have had some concerns in the past, the time now seems right for a new type of 100% mortgage, one that is underwritten prudently and where affordability is carefully taken into account.”
He added: “This new product will not be suitable for everyone, but it will help some of the new generation of home buyers get off the rental treadmill and enjoy the security of owning their own home.”