100% mortgages: the aim is laudable but there are very real risks - David Alexander

There will have been many first-time buyers cheering at the recent announcement by the Skipton Building Society that it was starting to offer 100 per cent no-deposit mortgages. The plan is designed to provide a lifeline to tenants by offering them a mortgage broadly in line with the rent they have been paying for the last year enabling rent payers the opportunity to transfer their monthly payments toward buying a house.

This is the first time that a 100 per cent mortgage without guarantors has been launched since the financial crisis in 2008. It will address the anomaly that many renters feel which is that if they can afford to pay £1,000 a month in rent then they should be able to afford to pay £1,000 a month in mortgage payments.

While this sounds like a welcome attempt to assist tenants to buy a home there are very real risks associated with this product. Buying at a time when prices are static or even falling in some areas creates the risk of negative equity for these new homeowners.

There is also the obvious point that home ownership carries higher costs than renting as maintenance and repair costs, house insurance, and potential interest rates rises are all borne by homeowners which tenants don’t have to think about. If widely adopted this could result in a housing boom which would be inflationary, potentially leading to higher property prices which could strain buyers on a tight budget. The worst-case scenario would be to replicate the boom and bust of 2008 which nobody wishes to repeat.

David Alexander is CEO of DJ Alexander Scotland Ltd

The further worry is that although initially sold as a product to help long-term renters there is little doubt that lenders will hope to expand similar products to all borrowers and therein lies the real problem. It will be too much of an opportunity to extend lending at a time when the market is slowing so many banks and building societies will be tempted to offer this, or a similar product, to other groups and the risk is that you repeat the mistakes of the last boom and bust.

Politicians will like this policy because it costs the Government and opposition nothing and we are coming up to a general election where both the Conservatives and Labour parties have said they want to be known as the party of home ownership.

But it is important to remember the aftermath of the 2008 crash where average prices took ten years to recover in some parts of the country. In Scotland average prices peaked in May 2008 at £145,641 and this price was not reached again until July 2017 when £147,566 was achieved. In Edinburgh seven and a half years passed before average prices recovered while in Glasgow it wasn’t until July 2018 – a full eleven years after the crash – that average house prices matched the peak in July 2007. In England it took just under seven years for prices to reach their previous peak while in Wales it was just under ten years.

No-guarantor 100 per cent mortgages were commonplace before the 2008 financial crash, but then disappeared as borrowers subsequently became subject to much stricter stress testing. This has generally been a good thing. While people may feel happy that lenders are considering them for mortgages without a deposit and equalling the full value of the loan, they tend to feel less happy if this borrowing becomes unmanageable and they lose their home while still owing a lot of money.

100 per cent mortgages without guarantors fell out of favour following the 2008 crash

This product has a laudable aim, but my concern is that in seeking to help tenants buy a home we may lose sight of the risks that deposit free, 100 per cent mortgages pose, and end up with another boom and bust in the housing market. The reality is that if we want to have more affordable housing for first-time buyers then we need to build more houses. This on its own would reduce the need for complex financial products which may only make things worse in the long run.

David Alexander is CEO of DJ Alexander Scotland Ltd