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Could the 100% mortgage be about to make a comeback?

Wednesday 14 November 2018

Key industry body, the Building Societies Association (BSA), has advocated for lenders to consider bringing back 100 per cent mortgages, as a way to combat falling home ownership among young people.

The suggestion is part of a wider report, titled Intergenerational mortgages report: Building on the Bank of Mum and Dad, which looks at the challenges facing buyers wanting to get on the housing ladder.

In recent years there has been a heavy reliance on the 'Bank of Mum and Dad', to the point where it's now become one of the UK's top ten lenders. And despite continued house building and Government intervention through several assistive schemes, a third of first-time buyers are still receiving financial help from family members - totalling £5.7 billion this year alone.

So what is the BSA proposing? Well, the report makes several 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.

But perhaps the most controversial, was the submission to revisit the 100 per cent mortgage. These mortgages, which mean a homebuyer would not need a deposit to purchase a property, could be offered to select customers, the report says, as an incentive for certain professions or for those with a high probability of receiving a substantial inheritance.

Such mortgages have mostly disappeared, but the BSA's September 2018 Property Tracker found that raising a deposit is now the biggest barrier facing would-be first-time buyers, which is likely to have prompted the calls to broaden available mortgage options beyond traditional forms of financing.

But critics are concerned. Prior to the financial crash, hundreds of lenders offered to lend up to 100 per cent of a property's value with no deposit, with the now collapsed Northern Rock even offering loans 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, which has sparked fears of a repeat of 90s negative equity.

Commenting on the report, Antoinette Sandbach, a Conservative MP who has campaigned for leasehold reform, 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.

Martin Lewis, founder of Money Saving Expert, was also against the recommendation, saying the thought of a young person taking out a 100 per cent mortgage left him feeling 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 five-seven per cent interest.”