Deposit-free mortgages are about to return to the housing market – but experts have warned they pose a risk of negative equity and threaten to destabilise the banking system.
Skipton Building Society plans to launch a new loan that would allow borrowers to bypass standard deposit requirements by using their rental payment history. Borrowers typically need to pay a deposit of at least 5pc of the purchase price when taking out a mortgage.
Skipton said its mortgage would “enable people trapped in rental cycles – where they’re prevented from being able to save for a house deposit – to access the property ladder”.
It comes as first-time buyers are increasingly shut out of the housing market by higher mortgage rates and the withdrawal of the Help to Buy scheme, which provided interest-free loans of 20pc – 40pc in London – for five years to help them buy a home with only a 5pc deposit.
The challenge of helping first-time buyers is a growing battleground area in the run-up to the next general election. Labour has announced it is working with lenders to develop a state-backed mortgage guarantee scheme to help first-time buyers take out loans.
Meanwhile, rising rents are making it harder for tenants to make the switch to home ownership. Rents have increased by 11pc in the past year, according to property website Rightmove.
Stuart Haire, Skipton’s chief executive, said the society’s new mortgage would help struggling renters.
“There are too many people who are trapped in rental cycles,” he said.
“These include people who have a decent history of making rental payments over a period of time and can evidence affordability of a mortgage, yet their only barrier to becoming a homeowner is not being able to save enough for a deposit and through lack of access to the bank of Mum and Dad.”
Benjamin Trevis, an economist at the Centre for Economics and Business Research, a think tank, said a zero-deposit mortgage may appeal to some aspiring homeowners but there are potential downsides.
“This form of debt will likely include an added premium on top of an already elevated cost of borrowing at present,” he said.
“Moreover, 100pc mortgages can increase the risk of default by borrowers as they are more vulnerable to falls in their own home value, which can lead to negative equity and problems with refinancing or selling their home.”
The banking system could also be put at risk if lenders start offering larger loans.
Mr Trevis said: “For lenders, the recent banking turmoil has highlighted the need for more liquidity in a banking system that is currently being squeezed by higher interest rates, so zero deposit mortgages may be adding more risks to balance sheets during an already difficult period.”
Adrian Anderson, of broker Anderson Harris, said borrowers who take out a 100pc mortgage could find themselves in negative equity “very quickly”, especially given falling house prices.
“It absolutely could be a risk to the banks if they started to do that,” he said.
He said lenders would be “massively exposed” if they did not take some sort of equity.
“The only time I remember banks lending 100pc of the purchase price was before the financial crash of 2008,” he said. “The banks were lending more than 100pc and got away with it for years because values were going up and up.”
But if applicants cannot keep up their payments or there is a bit of a crash in the market, he said the lender’s loan book “is effectively underwater” if properties are worth less than the mortgage.
“That’s an issue for the lender and the borrower,” he said. “The borrower won’t be able to sell, they won’t be able to sell and redeem the mortgage, unless they find some of their own cash to help repay part of the mortgage. People will be stuck: they won’t be able to sell and move on.”
In the run-up to the financial crisis, Northern Rock was the most prominent example of a lender that offered loans of up to 125pc of the mortgage value.
Other lenders currently offer 100pc mortgages but they are still backed by funds from the applicant’s family, experts said. Barclays offers a 100pc mortgage that requires an applicant’s family member to put 10pc of the purchase price into a cash savings account, which they cannot access for five years.
Skipton’s new mortgage would still need to be approved by City regulators the Prudential Regulation Authority and Financial Conduct Authority. The lender said it has not confirmed the loan-to-value of the mortgage and will look to manage the potential risks and challenges first-time buyers could face in the future.
