The troubling return of 100 per cent mortgages

Is there a greater weapon of financial mass destruction than the 100 per cent mortgage? Take out a loan equivalent to the full value of your home and it only takes one bad month for the Halifax house price index to land you in negative equity. 

If you have bought a new home, you will almost certainly be in negative equity from day one – as with a new car, a brand new home commands a premium which disappears the moment someone moves in and starts scratching the paintwork. But it is not just the borrower who needs to worry. When property prices fall, homes with 100 per cent mortgages secured against them cease to be fully-secured loans. This raises the prospect of the kind of situation we saw with so many banks in 2008/09, when many of their assets turned out to be tied up with sub-prime home loans.

What, then, to make of news that the Skipton Building Society has reintroduced 100 per cent loans? The organisation says that the loans will only be available to borrowers who have a good credit rating and who can prove that they have been keeping up with their rental payments for at least 12 months, but that is hardly reassuring. A great number of people can sail through life with financial ease – until they lose their job. In any case, even if a homebuyer does carry on paying the mortgage, that is not going to protect them against negative equity, which could trap them in their home for years to come, making it impossible for them to sell up and move on.

What is so remarkable about the Skipton’s move is that it comes during a falling housing market. The Nationwide index may have shown a small, unexpected upwards blip last month, but the general direction is still slightly downwards. Previously, 100 per cent mortgages have been a boom time product, which then get swiftly withdrawn once the black clouds gather over the market.

But Skipton does not seem to be the only lender in expansive mood. A Bank of England release shows that the number of mortgage approvals across the market rose from 44,100 in February to 52,000 in March. This is still lower than the monthly average over the past decade, but is a substantial turnaround nonetheless.

Net mortgage lending was, however, unchanged, showing that while significant numbers of people are buying property, there are also significant numbers selling. There has been plenty of anecdotal evidence of buy-to-let investors selling up in reaction to tax changes which make their investments look less appealing.

The year 2023 was widely predicted to be one of a housing crash. Yet just over a third of the way through the year, the story already looks like being very different. Once again, the housing market has defied predictions of its demise. So long as Britain has a rising population and a tight supply of homes it is hard to see a deep or prolonged housing crash.