Two thirds of financial advisers are worried about the risks of 100% mortgages

Two thirds of financial advisers are worried about 100% mortgages as falling house prices and rising rates could create ‘repayment crisis’

  • Lender Skipton launched a 100% mortgage for first-time buyers last week
  • Falling house prices could potentially leave homeowners in negative equity 
  • Experts warn that the risks of a 100% mortgage could create a repayment crisis

Six in ten independent financial advisers are concerned that 100 per cent mortgages will create a ‘repayment crisis,’ according to a new survey.

Lender Skipton Building Society launched a 100 per cent mortgage aimed at first-time buyers last week.

It means buyers can purchase a home without needing to save up – one of the biggest hurdles for those trying to get on the housing ladder.

However, the product leaves buyers at risk of negative equity, where the loan against the house is more than the value of the property making it hard to sell or remortgage, if prices fall.

Proceed with caution: 100% mortgages could help first-time buyers on to the housing ladder, but there are several risks they need to be aware of

This is the worry expressed by 63 per cent of financial advisers who deal with mortgage requests, according to new research from polling firm Opinium.

Alexa Nightingale, head of financial services research at Opinium said: ‘It is no doubt that 100 per cent mortgages are likely to help first-time buyers get their feet on the property ladder, and the thinking behind using rental payments as part of affordability checks could no doubt be helpful for those who have only ever rented.

‘However, with recent warnings from experts such as Andrew Bailey, Governor of the Bank of England, that buyers and banks need to be “very careful” with these types of deals, it’s clear that it’s important to keep the potential risks in mind when considering this type of mortgage.’

Overall, two thirds of financial advisers said they were concerned about the risks of this type of loan. 

Similarly, 61 per cent are concerned that 100 per cent mortgages could create a mortgage ‘repayment crisis’ in the event interest rates go up.

Rates rose sharply in October when the then-Chancellor, Kwasi Kwarteng, announced a wave of unfunded tax cuts that unsettled bond markets and pushed up the price of borrowing.

Since the start of the year mortgage rates have been slowly falling and now seem to have settled around 4 to 5 per cent. However, as the Bank of England continues to push up its base rate – now at 4.5 per cent- the fear is that mortgage rates will also rise. 

The average two-year fixed mortgage rate is now 5.32 per cent and the five-year fixed rate is 5.03 per cent, according to Moneyfacts.

Coupled with the fear that house prices will fall as inflation and increased interest rates continue to batter the market, experts are sceptical of 100 per cent mortgages and the associated risks. 

Elevated: Mortgage rates peaked last year and have slowly been falling - but they remain well above where they were two years ago adding financial pressure on buyers

Elevated: Mortgage rates peaked last year and have slowly been falling – but they remain well above where they were two years ago adding financial pressure on buyers

House prices fell 0.1 per cent in April, according to Halifax’s latest house price index, and it is unclear how house prices will react over the coming months to considerably higher mortgage rates than in recent years.

A third (35 per cent) of financial advisors that receive mortgage requests think 100 per cent mortgages are a good idea. 

However, despite this 32 per cent wouldn’t recommend 100 per cent mortgages to their clients, and over a third (38 per cent) wouldn’t recommend them to their family, friends or loved ones either.

In the last month, one in eight advisors said they had seen an increase in enquiries about 100 per cent mortgages, as well as an increase in enquiries about mortgages that use rental payments as part of their affordability checks.

The five-year fixed Skipton Track Record mortgage comes with a 5.49 per cent rate and a maximum term of 35 years. The maximum loan available under the scheme is £600,000.

Buyers will need to meet strict affordability criteria in order to be eligible for a loan – and industry insiders point out this is vastly different to these products pre-2008.

In addition to a strong credit score prospective buyers will also need to show a track record of affordability of all monthly rent and household expenditure for a minimum of the last 12 months.

They will be able to borrow up to 4.49 times their annual income, but mortgage payments must be the same or lower than their current rental payments. It is also understood that the mortgage product cannot be used to purchase a new build flat.

Lenders are often cautious with mortgages on these properties as they can lose value within a couple of years.

Best mortgages

What to do if you need a mortgage 

Borrowers who need to find a mortgage because their current fixed rate deal is coming to an end, or because they have agreed a house purchase, should explore their options as soon as possible.

This is Money’s best mortgage rates calculator powered by L&C can show you deals that match your mortgage and property value

What if I need to remortgage? 

Borrowers should compare rates and speak to a mortgage broker and be prepared to act to secure a rate. 

Anyone with a fixed rate deal ending within the next six to nine months, should look into how much it would cost them to remortgage now – and consider locking into a new deal. 

Most mortgage deals allow fees to be added the loan and they are then only charged when it is taken out. By doing this, borrowers can secure a rate without paying expensive arrangement fees.

What if I am buying a home? 

Those with home purchases agreed should also aim to secure rates as soon as possible, so they know exactly what their monthly payments will be. 

Home buyers should beware overstretching themselves and be prepared for the possibility that house prices may fall from their current high levels, due to  higher mortgage rates limiting people’s borrowing ability.

How to compare mortgage costs 

The best way to compare mortgage costs and find the right deal for you is to speak to a good broker.

You can use our best mortgage rates calculator to show deals matching your home value, mortgage size, term and fixed rate needs.

Be aware that rates can change quickly, however, and so the advice is that if you need a mortgage to compare rates and then speak to a broker as soon as possible, so they can help you find the right mortgage for you.

> Check the best fixed rate mortgages you could apply for