Bank of England governor Andrew Bailey says lenders and borrowers have to be “very careful” when dealing with zero-deposit 100% loan-to-value mortgages.
“I’m not going to say no to 100% mortgages but both lenders and borrowers have to be very careful about this,” he told the BBC.
He adds: “You can get quite a few problems. People can often get stuck with mortgages for a long period of time which they can’t trade out of.”
The governor’s comments come after Skipton Building Society launched a 100% LTV home loan aimed at renters earlier this week.
The mutual’s Track Record Mortgage allows tenants with “a strong track record of rental payments” to borrow the total cost of a property on a five-year fixed rate at 5.49%, at up to £600,000 over a maximum of 35 years.
The lender says its research shows that eight in ten tenants feel “trapped in rental cycles” because of high rents and rising living costs, which prevent them from buying a home.
It points out that there are 4.6 million households renting privately across England, which has jumped by 112% since 2000.
The average cost of a first-time buyer home lifted 2% to a record £224,963 in April, according to data from Rightmove last week.
Since the 2008 financial crisis, few 100% LTV mortgages have been made available, as regulators have deemed these loans can contribute towards wider instability across the economy, if borrowers take on lending they cannot afford.
Currently, there are 15 other zero-deposit products on the market, according to Moneyfacts, accounting for just under 0.3% of the UK market.
The move was generally welcomed by brokers, who see it as a chance to move tenants out of the crowded rental market and into homes, but some point out that this loan may leave borrowers dangerously overextended, or in negative equity, if house prices fall.
The governor’s comments also came after the central bank lifted the base rate by 25 basis points to 4.5% yesterday.
It was the 12th consecutive rise in interest rates, and the highest the base rate has been since October 2008.
The 25 basis point rise will increase a variable rate mortgage repayment by around £26 a month – assuming a 75% LTV mortgage on a £270,000 property, the average value of a UK home.
However, the cumulative effect of these rate rises means that homeowners in this scenario will have seen mortgage repayments increase by almost £500 a month.
