Caution Needed 100% LTV Mortgages Are Back

Skipton Building Society has today confirmed the launch of 100% loan to value (LTV) mortgages aimed at renters without a deposit who want to buy a property.

By comparison

If you are renting a 1 bedroom apartment worth £150,000 in Newquay, Cornwall, you can expect to pay rents of between £600 and £750 pm.

• The equivalent capital and interest repayment mortgage for £150,000 (no deposit) at 5.49% over 25 years is £925.24 pm and over 35 years is £804.54 pm.

If you are renting a 2 bedroomed apartment worth £240,000 in Newquay, Cornwall, you can expect to pay rents of between £800 and £1,000 pm.

• The equivalent capital and interest repayment mortgage for £240,000 (no deposit) at 5.49% over 25 years is £1,472.38 pm and over 35 years is £1,287.27 pm.

To secure a 100% LTV deal, you will need to demonstrate you can afford the monthly repayments and also prove a 12-month 'no arrears' rental history.

Comment

The pros to 100% LTV mortgages are:

• No need for a deposit.
• Getting on the property ladder to benefit hopefully, on future property price rises to build up equity.

The cons to 100% LTV mortgages are:

• Mortgage repayments are higher in general currently than rental payments.
• Interest rates are expected to increase in the short term.
• Property maintainance costs wil be payable by you rather than your landlord.
• Annual/Monthly service/maintenance fees and ground rents may be payable by you as apartments are usually leasehold plus houses if they are also leasehold, whereas your landlord will likely be paying these.
• Property prices may fall as interest rate increases and the cost of living have already started meaning you could be left in negative equity.

History tells us, when we look back to the late 1980s and early 1990’s that the property boom in the 1980’s was then curtailed when interest rates peaked in 1989 to 15%+ and then many property owners were trapped with negative equity after house price falls between the summers of 1989 and 1993 of around:

• -27% in East Anglia
• -18% in the East Midlands
• -29% in Greater London
• -5% in the North
• -31% in the South East
• -23% in the South West
• -13% in the West Midlands
• -12% in Wales
• -20% in Yorkshire and Humberside

The only exceptions being +4% in the North West, +28% in Northern Ireland and +10% in Scotland for the same period.  Source: Nationwide Property Price Calculator.

What this tells us is that where there has been strong property demand and price rises during and after Covid-19, virtually zero interest rates and stamp duty holidays, those inflated prices may now be about to fall back.  Skipton Building Society is taking a risk in the current market.  We hope their analysts and actuaries have called the market correctly and that history does not come back to repeat itself with negative equity.