buy-to-let mortgage

The return of the 100% mortgage?

Lenders need to bring back 100% mortgages to help first-time buyers and combat falling home ownership in the UK, according to the Building Societies Association.

The BSA report includes a range of recommendations to assist first-time buyers wanting to enter the property market. However, it is the burden placed on parents to help young people buy their first home that has provoked the call for mortgage providers to reconsider their stance on 100% mortgages.

Over half of first-time buyers reliant on the Bank of Mum and Dad

Buying a home as a first-time buyer is a significant challenge for young people, so it’s no wonder that 59% of younger homebuyers are reliant on parental assistance. Moreover, 87% of BSA members think that the Bank of Mum and Dad will continue to grow in importance over the next ten years.

Critics remain wary

In response to the BSA report, critics have warned that due to the higher interest rates charged, borrowers are more likely to default on a 100% mortgage. Following the 2008 crash, the Bank of England imposed stricter lender criteria, but the collapse of Northern Rock, who’s 125% mortgages were instrumental in its fall, is still very much in people’s psyche.

Will lenders take the risk?

The BSA report, aptly titled Building on the Bank of Mum and Dad, suggests that fintech solutions, such as open banking, could make risk assessments more accurate and support full value lending at less risk.

The BSA thinks that building societies could offer 100% mortgages for a small percentage of first-time buyers, without compromising their overall lending book, if certain strategies and parameters are put in place:

  • Mitigate risk by only offering to borrowers in certain professions, those with a high probability of substantial inheritance or borrowers with parental guarantees.
  • Take advantage of low interest rates to offer 100% loan to value borrowing, and use overpayments in the early years to reduce the LTV quickly.
  • Mortgage Indemnity Guarantee insurers provide cover for loans over 95%.

The question is whether other lenders agree? The report found that most underwriters are not ‘philosophically averse’ to 100% lending, but the associated risk is well appreciated.

The report states, ‘innovations in underwriting could help all potential first time buyers’ and no doubt it would help take the pressure off of mum and dad too.

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