100% mortgages a ‘dangerous game’, says Octane Capital
Taking out a 100% mortgage like Skipton Building Society’s is a “dangerous game” to be playing in the current climate due to uncertainty around interest rates, Octane Capital has warned.
This week Skipton Building Society widened its range to make it so previous homeowners, as well as first-time buyers, can take out a 100% mortgage.
Jonathan Samuels, chief executive of Octane Capital, said: “We’re a nation hell bent on homeownership and so it’s no surprise that demand for 100% mortgage products has spurred an expansion from first-time buyers to existing homeowners.
“However, it’s a potentially dangerous game to be playing in the current climate while interest rates are high and uncertainty remains around just when they are likely to come down.”
Octane Capital compared the monthly cost of Skipton’s 100% mortgage for both a first-time buyer and existing homeowner to the alternative mortgage route of placing a deposit via a traditional lender.
Back in May when Skipton first launched its 100% mortgage for first-time buyers, the average monthly repayment sat at £1,458 – based on their rate of 5.49% over 25 years and the average house price of £237,542 at the time.
In contrast, the average first-time buyer placing a 15% deposit via a traditional lender was making a full monthly repayment of £1,091 based on the average mortgage rate of 4.22%.
This meant a 100% mortgage was costing first-time buyers almost £370 (34%) more per month – over £4,000 more per year.
Skipton has now increased its rate to 6.19%, an increase of 0.7% since May of this year. The average rate offered by traditional mortgage lenders has increased by 1.12% to 5.34% during the same period.
But despite this lower rate of increase, the average first-time buyer opting for a 100% mortgage today is still facing a full monthly repayment of £1,572 – £340 (28%) per month more than those opting for a traditional mortgage having placed a 15% deposit.
For existing homeowners looking to climb the ladder via a 100% mortgage, the additional cost of borrowing without placing a deposit is even higher.
Based on the current average house price (£290,785) and when placing a 20% deposit, the average homebuyer would be looking at a full monthly repayment of £1,342 in today’s market.
However, opting for a 100% mortgage would see this monthly cost climb by £565 (42%) per month to £1,907 – nearly £6,800 more per year.
Samuels added: “The additional cost of a 100% mortgage is substantial and while you may secure a foot on the property ladder without the initial lump sum of a deposit, you will certainly pay for the pleasure in interest owed and then some.”