A mortgage expert is warning renters tempted by news that the Skipton Building Society has launched a 100 per cent mortgage product - the first of its kind since 2008.
Brean Home, the personal finance expert at financial service NerdWallet, says such products come with long-term financial risks that could be disastrous for prospective buyers.
Home cautions: “Housing affordability is a big barrier to homeownership for many prospective buyers. In 2022 full-time employees in England and Wales could expect to pay 8.3 and 6.2 times their annual earnings respectively on buying a home.
“Inflated house prices have hit home ownership for younger buyers especially hard over the last 20 years. In 2017 35 per cent of 25 to 34 year olds owned a home, down from 55 per cent in 1997.
“Instead, there has been an increase in those renting homes. Around 20.3 per cent of people privately rented their accommodation in 2021 compared to 16.7 per cent in 2011.And a rising number are continuing to live with their parents.
“The 100 per cent mortgage aimed at helping renters get onto the property ladder joins a handful of other providers in offering low-deposit mortgage products to help first-time buyers purchase their first home. But, while low-deposit mortgages reduce the challenge of saving up for a mortgage deposit, they come with long-term financial risks that could be disastrous for prospective buyers.”
Home warns that higher loan-to-value mortgages are seen as more high risk by lenders, and as such often pay higher interest rates, which could further increase the financial burden on buyers should rates keep rising. It also increases the risk of negative equity which may limit buyers ability to sell in the future. Negative equity also makes it more difficult to remortgage and could leave buyers trapped on costly variable-rate deals.
“Despite a recent relaxation of lenders’ rules - which remove the requirement to test whether prospective buyers could still afford mortgage repayments if the standard average rate increased by three per cent - today's typical house prices are considerably more than this income ratio.
“Although homeownership remains a top financial aspiration for many, there isn’t a magic bullet solution available. So buyers need to weigh up the long-term financial risks and rewards of any mortgage product and it’s always worth considering alternative routes to homeownership.
“For example, guarantor mortgages may also offer a viable option for buyers with someone available to cosign their home loan. Government schemes such as Shared Ownership, First Homes and Rent to Buy may offer more suitable home-buying options depending on your financial circumstances.
“In some cases, it may be worth taking a little more time to save up a larger deposit and build up your credit score to help unlock more competitive deals and interest rates.”
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