There has always been space for zero deposit mortgages. The product, along with interest only, was demonised by the regulator and it is positive to see it return.
It could be argued that we are seeing the housing market overheat and we are making the same mistakes again. But house price inflation has been allowed to run rampant and unchecked for more than a decade, fuelled by Help to Buy and buy-to-let mortgage products.
Help to Buy especially allowed a borrower with a small deposit to access a much higher value than their capital would permit, allowing for transaction values higher than could have been achieved without the scheme.
So what is the deal with 100 per cent mortgages?
Firstly, the assumption is that a zero deposit mortgage is on a capital and interest basis, so, if the market continues to remain buoyant and the loan is affordable the borrower will be each month paying back an element of capital and will build equity in the property, therefore there is no problem.
If property values fall faster than the outstanding balance that is only a problem if either the borrower wishes to move or they cannot afford the mortgage.
If a borrower wishes to move home then the product is portable, or, perhaps, it means they will need to rethink their plan.
Skipton should be applauded for not only applying logic to lending (which can often be lacking), but also looking to fill a gap that Help to Buy has created.Consent to let has become more widely available and is a possible alternative that was problematic when the last 100 per cent mortgages were arranged, meaning a borrower may be able to let the property and retain ownership rather than be forced to sell and realise a potential capital exposure.
The products are fixed rates, which means that the borrower can budget and they have demonstrated, under the Skipton scheme, they are affording rent comparable to the new mortgage cost.
So, affordability should only be an issue in the event of a change of circumstance – sometimes this is unexpected, but, again, there are options to let the property if needed.
Skipton has been innovative with its approach of actually saying 'if you can afford rent of X then you can afford a mortgage with the same payment'.
It has been an argument laid down for many years and they should be applauded for not only applying logic to lending (which can often be lacking), but also looking to fill a gap that Help to Buy has created – although this scheme is not available on new build flats.
For the limited number of borrowers that will meet the lender's criteria and score card (which I expect will be set very conservatively), it will be a much welcomed path to property ownership.
If the scheme is successful, which I hope it will be, other lenders will follow suit.
Negative equity is a red herring thrown into the net. We should be focusing on the solution it offers, not the remote risk it represents.
In the meantime, we need to find a way to cancel eye-wateringly high property price inflation and make the provision of housing a real priority, but that is another conversation.
Jonathan Burridge is the founding adviser at We Are Money
