Are 100 per cent mortgages about to make a comeback?

Deposit-free mortgages are about to make a return to the housing market. Skipton Building Society plans to launch a new loan allowing borrowers to bypass standard deposit requirements by using their rental payment history. Skipton Building Society said its mortgage would "enable people trapped in rental cycle – where they're prevented from being able to save for a house deposit – to access the property ladder".

Lenders currently offer 100 per cent mortgages, but funds from the applicant's family still back them. Barclays provides a 100 per cent mortgage that requires an applicant's family member to put 10 per cent of the purchase price into a cash savings account, which they cannot access for five years. Other than this, borrowers typically need to pay a minimum deposit of 5 per cent of the purchase price when taking out a mortgage.

Is this likely to help first-time buyers get onto the property ladder? Or could this risk negative Equity and repeat of the 2008 financial crisis when 100 per cent mortgages were standard?

Average rent as a percentage of take-home pay vs Average first-time buyer mortgage repayments:

According to Nationwide, first-time buyers spend 39 per cent of their take-home pay on the mortgage payment. According to Benjamin Trevis, an economist at the Centre for Economics and Business Research, a think tank, 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". As the chart below highlights, first-time buyers are spending 39 per cent of their take-home pay on mortgage payments, which is already 9 per cent higher than the long-run average of 30 per cent.

In contrast, according to the Office for National Statistics (ONS), England's average rent as a percentage of income stood at 26 per cent. As the graph below highlights, London is the only area in England where the average rent as a percentage of take-home pay is 39 per cent.

According to Moneyfacts, the average two-year fixed rate for a 95 per cent loan-to-value mortgage was 5.82 per cent. Nationwide's modelling was done at an average rate of 5.5 per cent. The premium likely to be charged for a 100 per cent mortgage will likely cross 40 per cent of take-home pay, making it unaffordable to keep up with payments if a 100 per cent mortgage is purely based on rental payment history.

Negative Equity could be a threat:

The last time the mortgage payments crossed 40 per cent as a percentage of take-home pay was in 2008. That was also when banks were lending 100 per cent of the purchase price of a home. However, banks got away with it as the value of homes increased yearly. It is not the case now. Nationwide reported that house prices fell for the seventh consecutive time last month and fell by 3.1 per cent last month, making it the biggest annual decline since 2009.  

If the borrowers cannot keep up their payments or there is a crash in the market, that will be an issue for the lender and the borrower. The borrowers cannot sell unless they find the cash to repay part of the mortgage. People will be stuck and unable to move on. And this could be a repeat of 2008, where the lender's loan book is effectively underwater if the properties are worth less than the mortgage.

Any new mortgage product such as this must still be approved by the City regulators, the Prudential Regulation Authority and the Financial conduct authority. Any lender would have to demonstrate how they would manage the potential risks and challenges first-time buyers could face.

However, it is unlikely that in a climate like the one we are experiencing, 100 per cent mortgages would return anytime soon. Even if they did and rent payment history was part of the financial assessment, with existing interest rates, the mortgage payments are likely to far exceed the rent payments making them unaffordable.

Such a mortgage product can only work if backed by the government. Labour has announced that it is working with lenders to develop a state-backed mortgage guarantee scheme to help first-time buyers take out loans.