There is no doubt that getting a mortgage in 2023 is more challenging than it has been for several years, with interest rates pushing up the affordability criteria and house prices continuing to rise. Saving up for a deposit is the biggest barrier for most first time buyers, with the average deposit now £62,500 for a joint mortgage.
For those on the wrong side of this hurdle, the announcement of a zero deposit mortgage by Skipton Building Society will no doubt have caught their attention. The lender described the move as “a lifeline to tenants across the country, to help them break out of their trapped rental cycles and onto the property ladder for the first time”.
However, can the no deposit deal really be as good as it seems? According to the BBC, prospective buyers should have a good look before they leap. The new organisation reports that Andrew Bailey, the governor of the Bank of England, has said that a 100% mortgage could cause “quite a few problems.”
When questioned, Mr Bailey commented: “I think we have to watch it very carefully. I’m not going to say no to 100% mortgages but both lenders and borrowers have to be very careful about this. You can get quite a few problems. People can often get stuck with mortgages for a long period of time which they can’t trade out of.”
The Skipton mortgage deal has an interest rate of 5.49%, which is above the average rate of around 4.5%. This means that over a lifetime, the mortgage holder will end up paying considerably more than a homeowner who put down an initial deposit.
The other danger is that should house prices suddenly crash as they did after the 2008 financial crisis, those with a 100% mortgage could be trapped in negative equity. This is a situation where the value of the property is worth less than the deposit taken out against it, meaning that it is impossible to sell without taking a big financial hit.
This is partly what contributed to the 2008 financial crisis in the first place, as mortgage lenders had far more relaxed affordability criteria than they do now and sold thousands of subprime mortgages. Financial experts are now concerned that history could repeat itself, despite all the reforms of the lending process over the last 15 years.
Skipton Building Society has said that while its no-deposit mortgage does not require a guarantor, the applicant must be able to demonstrate at least a year’s worth of rental records and have a good credit history.
Anyone who is concerned about getting a mortgage deal because of problems with their credit record, such as an Individual Voluntary Arrangement, should talk to a specialist broker who will be able to match them up with lenders most likely to consider their application.
If you would like to talk to IVA mortgage specialists, please get in touch with us today.
Your home may be repossessed if you do not keep up with your mortgage repayments.
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