A short-term solution or a long-term problem? The jury's out
Heralded with much fanfare, April Mortgages has confidently unveiled a new offering for those who find saving for a deposit too much of a challenge against the high cost of living, and don’t have support from the so-called Bank of Mum & Dad. But is its 100% LTV, no deposit product a curse or a blessing?
Opinion seems somewhat divided in response to the lender’s newest creation, that enables homebuyers to borrow all of a property’s value, with rates fixed for 10 or 15 years. It’s designed for borrowers who are earning steadily and have good credit, and allows them to apply for up to 4.49 times their income.
With interest rates starting from 5.99% and no early repayment charges (ERCs) when moving or paying off the loan, April’s product could be the answer for frustrated first-time buyers. They may be attracted too by the fact that unlimited overpayments are permitted, and rates automatically fall as the borrower builds equity and moves into lower loan-to-value bands. Even so, the jury appears to be out on whether this a good long-term solution – or a way of building up financial problems for the future.
Richard Campo (pictured left), head of growth at Heron Financial, applauds another lender offering a 100% mortgage - he has no hesitation in recommending this type of loan to clients. “People, very wrongly, have a negative perception in their heads around 100% mortgages,” Campo said. “April seem to be taking a very sensible approach as they have very clearly built in safeguards such as a max LTI of 4.49%, a 10-year fixed rate - or indeed 15, meaning should Liz Truss get defrosted you would be safeguarded against rate shocks in the earlier years and clearly a high bar in terms of credit score. This all looks very sensible to me. April also have that huge USP of their fixed rates being less restrictive, so clients are free to move or pay down heavily without any exit penalties. Other lenders really should be taking note.”
All that said, Campo believes this will still remain a niche proposition. “Not all clients want a 10-year fixed rate even with the flexibility April have built in, and if you do have a deposit, you will want to use it to get a lower rate elsewhere. While we still have the ‘big six’ lenders that do around 85% of all residential mortgages, until one of those lenders comes to the table with a genuine 100% loan, I think this will play a small, but very important role in the market. I am a huge advocate of homeownership, it’s good for the individual, good for the economy and if you are credit worthy and can afford it, why not?”
People need to consider the alternatives, Campo suggests. “Rent is brutally expensive and can erode your ability to save, and living at home, getting under your parents’ feet, is far from ideal for a young adult,” he said. “I would not be surprised if buying with a 100% loan is at least the same, if not less than the comparable rent in the area now, so you can clearly evidence affordability that way, and I have always believed you are best paying off your own mortgage rather than someone else’s.”
Adviser Serena Smith (pictured second from left), at Mortgages with Serena, also supports this approach to lending as, in her view, it has robust affordability stress testing. “The hardest bit about the home buying process is the opposing interest rates of mortgages wanting to be low & savings rates high - both cannot simultaneously exist, making it difficult,” Smith said. “This is a more reasonably priced product for the average person, and not £50k minimum-plus incomes required, that have become the norm. It won’t be for everyone but it will certainly help people onto the ladder or for their first family home perhaps. With unlimited overpayments, and no ERCs, what more could you ask for?”
Broker Alison Dearman (pictured second from right) thinks it’s positive to see another no deposit mortgage product joining Skipton Building Society’s Track Record in the marketplace, though does sound a note of caution too. “This is a lifeline to clients stuck in the ‘not able to save a deposit’ rut,” Dearman commented. “It’s also great that the interest rate goes down as the LTV decreases. This is a product, though, that needs careful consideration and advice, and the client needs to fully understand the risks involved. We like to think house prices dropping and negative equity are a thing of the past and hopefully that’s true, but never say never. And yes, you can repay the loan without ERCs if you sell the property, or from your own funds, but what if you need to remortgage because of a change in circumstances like a relationship break down and you don’t meet the lending criteria on your own? If you were forced to go to a new lender the very high ERCs in the early years could be problematic.” She summed up: “A positive move by April, but to be handled with care. I’m sure other lenders are watching and waiting.”
Read more: Brokers on current mortgage market trends
A risk of negative equity?
Emily Franks (pictured right), director of Emily’s Mortgage Services, welcomes help for first-time buyers in a challenging market, but has her reservations about this product. “One hundred per cent (100%) mortgages make me a little bit twitchy,” she said. “These are mostly aimed at first-time buyers and, as brokers, it is absolutely vital that we educate our clients on the risks of negative equity. I’ve seen more clients in negative equity in the last two years than I have in my entire career and it begs the question as to whether 100% lending is appropriate. The argument has been that if the lender is happy to offer, it then so should brokers be. But lenders were also happy to use endowments as repayment vehicles and that caused a bit of a headache in the past.” She added: “It is positive to see a lender having so much confidence, but I think brokers and buyers should approach with caution, ensuring that the client fully understands the risks involved.”
There is greater enthusiasm from Katie Brown (pictured inset above), a senior mortgage adviser at The Mortgage Mum, who reports huge interest from potential borrowers. “We are one of the brokers able to advise on this new product,” Brown said. “Since launch we have received hundreds of enquiries which really does show the need for a product like this. Although fixed for a longer period of time than we are used to, it comes with great features.” She noted: “The product is not necessarily right for everyone and should be advised based on full affordability testing and the negative equity risks clearly explained. I feel it’s a great product for those struggling to get on to the property ladder, with long term security of their monthly commitment.”
