MortgagesMay 9 2023

Brokers warn of negative equity risk on deposit-free mortgages

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Brokers warn of negative equity risk on deposit-free mortgages
(Jason Alden/Bloomberg)Brokers have raised concerns that a fall in house prices could lead to borrowers falling into negative equity.

Brokers have widely welcomed the introduction of a deposit-free mortgage, but there are concerns over the impact a drop in house prices could have on borrowers.

Skipton Building Society has launched a deposit-free mortgage, aimed at renters, with an interest rate of 5.49 per cent for a maximum term of 35 years.

Tenants who have 12 months of on-time rental payments will be able to borrow the entire value of a property with the five-year fixed-rate mortgage - the first of its kind to return to the market for some time. 

The building society said the product fills a "clear gap" for first-time buyers who cannot rely on family money or savings to build up a deposit.

Many brokers welcomed the news, with Amit Patel, adviser at Trinity Finance, congratulating Skipton for its “bold and innovative plans”.

HallelujahRhys Schofield, Peak Mortgages and Protection

“Renters face a big challenge when they want to transition between renting and buying their own home and this product will finally bridge the gap,” he said.

Rhys Schofield, managing director at Peak Mortgages and Protection said: “Hallelujah. 

“Something to break the cycle of clients who can clearly support eye-watering rents each month yet as a result have limited capacity to save for a deposit.”

Many brokers highlighted the impact rising rents have had, and even if “only 10 per cent” of renters qualify for the product, that is a step forward in a challenging market.

“Skipton delivering a massive shot into the arm of the mortgage market is fantastic news,” Schofield said.

Craig Fish, director at Lodestone Mortgages & Protection called it a “decent rate for a decent product” that will help those who need it the most.

“I suspect we now may start to see a few more lenders offering similar products, which will be a great stimulus for the lower rungs of the property ladder,” he added.

Negative equity concerns

However, a number raised concerns that a fall in house prices could lead to borrowers falling into negative equity, where the house is worth less than the mortgage borrowed against it.

Rita Kohli, managing director at The Mortgage Stop, said the news is “welcome” for first-time buyers, but the volatility of the housing market is a worry.

Brokers are keeping their eyes very much peeledSteven Morris, Advantage Financial Solutions LTD

“Launching this in a market where house prices could fall further is a concern and means that, as advisers, we will need to make sure clients understand the risk of negative equity very clearly.”

Samuel Mather-Holgate, independent financial adviser at Mather and Murray Financial, said: “This is a brave move by a lender as the housing market is on shaky ground,” but added it could “pay off” for Skipton.

“Rates are competitive, and if inflation falls away, the economy could shore up and the housing market rise next year, ensuring equity in the properties and reducing their risk. 

“It’s not clear yet just how squeaky clean your credit score needs to be to get one of these mortgages, but it’s likely that Skipton will be super-selective.”

Other brokers were more critical.

Graham Cox, founder of, said he was “amazed” that the Prudential Regulation Authority gave Skipton the go-ahead for the product. 

“I understand the logic of trying to help those who are rent-trapped, and unable to save for a deposit, but to me it's addressing the symptom rather than the cause, which is that house prices are too high.”

The grave danger is borrowers will overextend themselves, he said. 

“The slightest fall in house prices, and I believe they'll fall significantly over the next 12-18 months will leave homeowners in negative equity, with the property worth less than the mortgage balance.”

Steven Morris, advising director at Advantage Financial Solutions LTD said there might be “some sort of catch” to provide extra security for Skipton given the current market uncertainty.

“This could be a linked 'forced savings plan', which is assigned to Skipton, until the loan-to-value drops below a certain level, or using a landlord discount to get the LTV below 95 per cent from the get-go, without any physical deposit being required. 

“For now, would-be borrowers and brokers are keeping their eyes very much peeled.”