What are the risks of taking on a 100% home loan for renters?

Whilst some are describing Skipton Building Society’s first 100% home loan for renters as revolutionary, Claire Colborne, Associate Legal Executive within our Residential Property team in Dorchester, fears that the loan could be risky given the current uncertainty in the market.

Skipton Building Society has recently announced the introduction of a new 100% home loan for renters. This is aimed at first time buyers who are able to evidence that they have a 12-month record of paying rent on time and are able to pass affordability checks.

To get one of the new mortgages you:-

• Need to be a first time buyer aged 21 years or above.
• Need to have been renting for at least 12 consecutive months out of the past 18 and be up to date on all rental payments during this period. You will be required to provide proof of this via bank statements or confirmation from a letting agent.
• Need to be up to date for at least 12 consecutive months out of the past 18 months on household bills, such as Council Tax and Utilities. Again, proof will be required.
• Cannot have missed any other repayment commitments over the past 6 months.
• Are not looking to buy a newbuild flat.

Skipton has structured the mortgage product so that the monthly mortgage payments must be equal or lower to the rent the borrower has been paying. For example, tenants who have been paying rent of £1,300.00 a month over the last six months will have a maximum monthly mortgage payment of £1,300.00. This will also determine the maximum amount that they are able to borrow.

Whilst on the face of it the principal may sound appealing to first time buyers who cannot afford to save a deposit or who do not have access to family money, it does not come without risks.

The interest rate on Skipton’s 100% mortgage is currently 5.49% and is fixed for five years. This is higher than the average five year fixed mortgage rate for those that have been able to save a deposit and maybe set to increase further following The Bank of England recent interest rate rise.

Secondly, speculation in the housing market would seem to imply that house prices are set to fall significantly over the next 12-18 months which will leave homeowners in negative equity. As an example, where you have a 90% mortgage (and so have paid a 10% deposit), property prices would need to drop by more than 10% for you to risk falling into negative equity, the term used when your mortgage exceeds the value of your home. However, with a 100% mortgage, property prices would not need to drop far for this to happen. In an unpredictable and uncertain property market, taking on a 100% mortgage, whilst appealing on the face of it, could leave you in a more vulnerable position than remaining renting and saving for a deposit in the more traditional way.

For more information on buying, please contact Claire Colborne or email claire.colborne@battens.co.uk or contact her at 42 High West Street, Dorchester.