Home Buying

The Barclays 100% mortgage is here

Barclays has launched the first 100% mortgage from the high street in 8 years, in what the FT calls a ‘sign of a return to riskier lending’. The mortgage needs to be supported by a ‘helper’, most likely a family member, who guarantees the mortgage by putting 10% of the property purchase price into a linked savings account.

The scheme has attracted plenty of attention, with some commentators criticising Barclays for taking a risky approach, with others pointing out that this could cause the gap in access to housing to widen.

How it works

Those struggling to get on to the property ladder will be heartened to hear that they can now apply for a 100% mortgage from Barclays via the (revamped) Family Springboard mortgage. A helper, most likely the buyer’s parents, simply needs to put at least 10% of the property value into what is effectively a savings account, linked to the mortgage, giving the bank a form of security against default.

The 10% sits in an account gaining interest (currently tracking the Bank of England base rate, plus an additional 1.5%) for 3 years. The helper gets it all back if the borrower pays their mortgage repayments for the three-year period. So, while it might feel like a 90% mortgage, it’s almost more than 100% – the deposit is only provided temporarily, and comes back with interest.

It is being marketed as an enhancement to the bank’s Family Springboard mortgage – instead of a 5% deposit being required, a contribution of 10% of the purchase price is placed in a ‘Helpful Start’ account for three years.

The mortgage is at a fixed rate of 2.99% for 3 years and the maximum loan amount is £500,000 – below the average property price in the UK capital. (The rate for those with a 100% mortgage will be slightly higher than for those borrowing 95%, who will expect to pay 2.79%).

House

Is it good?

It’s certainly a great way for Barclays to win new customers. Arguably, it represents a boost for younger potential buyers – but only if your parents are well off. Buyers who might have struggled to do so get a new home, and parents or other family members who can afford to put a chunk away for three years get it back plus interest. If you are not in the position of having family members that can afford the 10%… sorry. As the Guardian puts it, “thanks to another influx of buyers, prices are about to rise even further.”

However, Barclays argue that it takes the burden off parents who are expected to provide a significant deposit to their offspring – which, according to their research, 35% of first-time buyers will ask their parents to do, with 20% expecting it to be a gift that doesn’t need to be paid back. Similarly, Legal & General have confirmed that ‘the bank of mum and dad’ finances 25 per cent of all mortgage payments.

The new product also means that funds can be ‘recycled’ for other children – good news for parents.

Taking the strain off parents

The Legal & General research also noted that parents will lend over £5 billion this year, funding deposits for more than 300,000 mortgages. “The bank of mum and dad’s average financial contribution is £17,500 or 7 per cent of the average purchase price of a home.” Indeed, the ‘bank of mum and dad’ would be one of the top ten UK lenders if it was indeed a real bank.

Affordable housing in the UK is clearly a massive problem, with professional couples in their thirties still having to rely on parental assistance to make this significant life step.

Lending rules

Whether it’s good or bad for house buyers, critics are noting a return to the type of lending seen before the financial crisis – banks were offering loans of up to 125% the value of properties, leading to lots more risk. Indeed, another aspect of this new product is that a first-time buyer – that can be a couple or an individual with an income of £50,000 or higher – can take out (up to) five and a half times their income rather than 4.4 times, which was the previous limit.

The 5.5 multiplier applies only to Barclays Premier customers, but for other borrowers the limit is still five times their salary.

The Mortgage Market Review (MMR), new regulations on risky lending introduced in 2014, doesn’t actually preclude 100% loans, but it does mean that more stringent affordability tests are in place. Lenders must now examine outgoings as well as incomes, to ensure mortgages can be paid back even if the interest rate goes up.

House

A return to the bad old days?

Well, not quite. Back in 2007, banks were offering 125% mortgages and lending up to 6 times a buyer’s salary. And look again at the criteria: £50,000 is way beyond the median UK income.

As the FT notes, “Since the financial crisis first-time buyers have faced tighter mortgage lending rules and rising prices. The problem is particularly acute in London where current property values are 49.2 per cent higher than their pre-crisis peak.”

The fact that there hasn’t been a mortgage product of this type since 2008 isn’t just about market conditions and regulations – the PR around lending like this has been pretty negative.

Mapa Research analyst Jess Morley comments,

“The fact that the MMR does not rule out 100% LTV mortgages means that this type of lending isn’t inherently risky. The sub-prime mortgage lending that led to the financial crisis in 2007 developed from lenders lending to people who would never have been able to afford the loans, rather than the LTV of the loans themselves. In this instance, Barclays has put in place very strict criteria that should ensure that the loan is affordable for those who choose to take it out, effectively it is applying the principle of an offset mortgage to the deposit.

“However, there are still concerns. The MMR has a number of elements that are reasonably subjective in their interpretation this means that there are loopholes in its execution. The re-introduction of the 100% LTV mortgage by Barclays, in addition to the fact that Halifax have raised the maximum age limit of mortgage lending to 85, indicates that lenders are beginning to feel more comfortable with the regulation and experimenting with what is and is not acceptable within the boundaries. As the large majority of financial regulation is reactive rather than proactive, there is a risk that this experimentation, which seems positive on the outset, could lead to a slippery slope downwards that could have unintended negative consequences.

“Furthermore, this is another example of the financial services industry encouraging consumers, particularly young consumers, to run their lives on credit. An individual who is earning a salary of £50k should be able to save for a deposit and should be encouraged to do so. Making it seem like anything is possible with no savings leaves people very exposed to any unexpected changes in circumstance in the short-term and with little options for future-proofing over the longer term. This is a dangerous mentality to encourage. 

“Ultimately these are risks that would be worth taking if the new product had the potential to make a considerable difference to struggling first-time buyers. In this instance, this does not seem that likely. It seems again to be a product that is giving a leg-up to those whose parents can afford to give them assistance, and not offering any help to those stuck in a never ending cycle of account-draining rent that prohibits them from getting on the property ladder. The reality is that this is an issue that needs to be tackled collaboratively by government and financial services providers. Sole products launched by financial services providers, like Barclays, will help a handful of individuals and work well to improve brand image but will do little to help the overall housing crisis facing the UK as a whole, and London especially.” 

 

For more insights on the world of mortgages, subscribe to our quarterly mortgages dashboard, which tracks UK providers with specific focus on their digital execution. Need more information? Contact us today.

Post a comment

Like what you see?

Subscribe to our newsletter to receive a regular summary of our latest articles



Sign Me Up

Fill Details Below

We only use your details to send you information about Mapa.