Return of the 100% mortgage

14-Nov-18


Industry’s call to help young buyers awakens fears over negative equity

Lenders should consider bringing back controversial 100 per cent mortgages to combat falling home ownership rates among young people, according to the Building Societies Association, a key industry body.

The mortgages, which mean a homebuyer does not need a deposit to purchase a property, could be offered to select customers, the BSA said in a report on the growing reliance on the “bank of mum and dad” in the housing market. These customers could include people in professions or those with “high probability of substantial inheritance”.

The BSA’s report includes a number of other recommendations to help first-time buyers, such as tax breaks to encourage the transfer of wealth to the young and measures to encourage older people to downsize.

Prior to the financial crisis there were hundreds of lenders offering 100 per cent of a property’s value to people with no deposit, with Northern Rock, which has since collapsed, offering loans of up to 125 per cent. The credit crisis and a fall in house prices led to many of these households being stuck in negative equity or defaulting on their loans as they struggled to meet the repayments.

Such mortgages have mostly disappeared, but a combination of rising property prices and stricter lending criteria has led to ownership rates tumbling among the young as first-time buyers have struggled to find larger deposits. The latest industry figures show the number of mortgages completed by first-time buyers fell 4.5 per cent in September compared with last year.

The BSA is the industry body for UK’s 43 building societies and lobbies government and regulators on their behalf. About 23 million Britons are customers of a building society.

Antoinette Sandbach, a Conservative MP who has campaigned for a reform of leasehold properties, said she was “very concerned” about a return of high loan-to-value mortgages. “I think with Brexit coming up it is very risky, with the potential for negative equity,” she said. “I remember negative equity from the 90s and [remember how] houses were repossessed. There are more imaginative solutions.”

Martin Lewis, founder of Money Saving Expert, the consumer website, said the thought of a young person taking out a 100 per cent mortgage left him “nervous”. He added: “I already have concerns about how we push young people on to the property ladder with 95 per cent mortgages; these are far more expensive than mortgages with a 10 per cent deposit. Locking yourself into an unaffordable property is not a good idea. I’m not convinced building societies will be able to offer these at attractive rates — they are going to be at 5-7 per cent interest.”

Sir Peter Bottomley, another Tory MP, said rising interest rates could make such mortgages unaffordable and force homeowners into selling. “Anyone who borrows 100 per cent thinking that interest rates will not go up or that the property’s price will rise is potentially making a life-changing mistake,” he said.

Some mortgage brokers welcomed the BSA’s suggestion. Nick Morrey, of John Charcol, said: “Bringing back 100 per cent mortgages is one of the best things to help first-time buyers, mostly because the options they have are so limited.”

Others said there was little interest among lenders in reviving 100 per cent mortgages. “They have a bad reputation,” Aaron Strutt, of Trinity Financial, said. “They are deemed too risky.”