100% mortgages: the good and the bad

Home & Garden

June 19, 2023 • John B

When it comes to the British economy, it feels like a long time since we’ve had any good news to write home about. Whether we’re fretting about inflation or hiding under the covers from high street horror stories, it’s easy to feel lost at sea. In fact, some days it can feel like we’re wading back to shore through waves of treacle, and getting nowhere fast… but, as we start to lean in to summer, are we finally starting to see some green shoots?

According to PWC, maybe. The UK is forecast to see 0.1% growth in 2023, and by the end of 2024 we should be back on course to see out that year at a cool 1% uplift. Beyond that, all being well, we should be set to round off 2025 at about 1.6%.

So, we’ve missed a recession by the skin of our teeth – break out the biscuits! But what does this actually mean? A question that certainly warrants its own dedicated article, which we’ll be publishing in the coming weeks. Today’s discussion is around the housing market, and, more specifically, the recent news that Skipton building society have launched the first, non-guarantor, 100% mortgage product since the Global Financial Crisis of 2008. A time many of us are still trying to forget! The worst recession since World War 11… the cause of which was linked to the US subprime mortgage crisis which hit the British banking sector with a bang! Whilst I’m sure there are multiple millennials who will rejoice from the rooftops, is this 100% mortgage really a good idea when looking at the bigger picture? Let’s spend some time digging around the subject…

The property market is made up of four key categories: Privately owned homes, council homes, rentals via private landlord and housing association properties. Each of these products differ considerably and as a whole, contribute to the overall economic growth of the country. The well-being of the economy is somewhat driven by the property market and impacts of a number of attached industries… take construction, for example. The big question is, does this latest incentive from Skipton play to the best interests of the customer, or is it a convenient headline that bolsters the brand. Hopefully, not the latter… remember Northern Rock? If you don’t, you’re not alone!

What’s exactly is a 100% mortgage? In simple terms, it allows you to borrow the entire value of the property without having to grind out and save a deposit. So, if the property you’re interested in is £175,000, then the mortgage is also £175,000. You start off with zero equity in the property. Aside from this product, the only way to get a mortgage without having a deposit is to either, have a guarantor or take out a family deposit mortgage, which is where a family member uses their own savings as security. 100% mortgages aren’t a new concept, but they disappeared from our shelves in 2008 when the crisis hit as they were perceived to “high risk” by the banks. A fact that cannot and should not be ignored. Could this be history repeating itself?

Millennials are often, fondly referred to as, generation rent – but there’s actually quite a serious undertone to that marketable moniker. Yes, there’s no question that not having to squirrel away to save up a deposit, removes a significant barrier. But at what cost? House prices are always on the rise, right? The sooner you can get on the ladder, the sooner you can start to reap the rewards… right?! Not necessarily. It is true to say that, in theory, you’re better off paying towards an asset that eventually you will own, as opposed to paying rent, which could be considered dead money, but if things. What is also true is that, for the most part, you’re better off not leaning on family members and alike… we’ve all heard the saying, “never mix business with pleasure”. The same can be true when it comes to money and those close to us. It’s their hard-earned cash that’s at risk, as well as their borrowing potential for the future, should we fall on hard times. 

The more you think about it, the more apparent the risks become. According to the Office for Budget Responsibility (OBR), the governments independent forecaster, house prices are predicted to fall by 10% over the 2 years. We appear to be in the eye of the perfect storm, inflation is high, as are interest rates, and this will likely dampen the housing market. Skipton’s 100% mortgage offers a five-year fixed rate of 5.49%, whereas the average rate for the same term is 5%. If the market does drop, and house prices fall even slightly, those who owe 100% of their mortgage will immediately find themselves in negative equity… not an enviable position.

The real question here is, why is it so difficult to get on the property ladder in the first place? Property prices have been rising at an incredible rate in recent years. The gap between the average property price and the average salary has also grown, considerably. In 1996, the average property price in the UK was £88,000 and the average salary was £24,709. A property to income ratio of 3.56%. Fast forward to 2022, the average house price in the UK was £294,000 and the average salary was £38,626. This equals a property to income ratio of 7.61%. Can you see where I’m going here…

Whilst the idea of a 100% mortgage product sounds good on the surface, the worry is that this solution addresses a symptom rather than the cause, which is, that house prices are far too high and at some point, there must be a crash, which will hit those with lowest LTV (loan to value), the hardest. 

Food for thought.