Are zero deposit mortgages too dangerous?

Ex Sun-reporter Russell Findlay has a big idea to help fix the nation’s housing affordability crisis. That idea (among a number of others to help with his bid to lead the Scottish Conservative party) is to allow first home buyers, who match certain criteria, to get 100% mortgages.

Zero-deposit mortgages, however, have been labelled risky by a number of commentators who warn they could lead to a rise in home repossessions. Jonathan Adams, an assistant professor at Saint Joseph’s University teaching real estate finance, told reporters that zero deposit mortgages have many attributes that exacerbated the 2008 housing collapse. noting that those who qualified for the program are likely to suffer when home prices are falling. That having been said, The Skipton does already offer a 100% Track Record Mortgage:

• Five-year fixed rate product over a max term of 35 years
• Tenants can borrow over 95% up to 100% loan to value
• Available to tenants aged 21 and above
• Available for first time buyer purchases or people who haven’t owned a house for at least three years
• Subject to affordability and credit score, plus evidence of a minimum of a 12-months good track record rental history

Findlay has prioritised homeownership as a central element of his campaign to replace Douglas Ross as the Tory party head, in what he calls ‘turning generation rent to generation own’. Yet, some experts believe that zero-deposit mortgages contributed to the financial crash in 2008.

David Alexander, the CEO of estate agency DJ Alexander Scotland, expressed concern to The Times that Findlay’s approach was risky. He noted that previous attempts at implementing zero-deposit mortgages had ended poorly.

Alexander explained: “House prices fluctuate, and without any buyer equity, individuals could quickly find themselves in financial distress. These types of policies can lead to an initial surge in prices, which may eventually result in a boom-and-bust cycle, especially if interest rates increase, or if there are job losses or personal issues like marital breakdowns. This could, in turn, cause a spike in repossessions.”

Findlay has responded to critics by saying that while he appreciates feedback, he remains committed to introducing bold ideas to address the housing crisis. He emphasised that these mortgages would only be available through a government scheme for tenants with a solid history of paying rent on time.

Alexander was more supportive of Findlay’s intention to eliminate the “socialist rent controls” established by the SNP. As part of a £90 million plan, Findlay also proposes increasing the threshold at which the Land and Buildings Transaction Tax (LBTT) is applied, from £145,000 to £250,000.

Alexander agreed that bringing the tax in line with England is “the only fair approach” for Scottish homebuyers and supported the push for a more efficient and faster process for planning and building warrants.

A recent report by Homes for Scotland, a trade organization, revealed a significant drop in the proportion of new homes being built by firms constructing between three and 49 properties annually - from around 40% in 2017 to just 20% in 2023.

Today we publish a critical update on our SME home building sector which is essential reading for those who wish to understand more about the environment SMEs operate within and the particular challenges they face https://t.co/8fyjYCpwOo pic.twitter.com/WvRZZzLDbY

— Homes for Scotland (@H_F_S) June 24, 2024

With nearly 30% of households in Scotland facing some form of housing need, the Scottish government has declared a nationwide housing emergency, blaming UK government austerity measures rather than its own taxes and bureaucracy.

A Homes for Scotland representative commended Findlay for tackling the issues highlighted in their report, noting that reforms to the planning system and measures to enhance site viability, particularly for smaller builders, are urgently needed from all political parties and the government.

Findlay stated that his proposals represent “bold ideas and fresh thinking” aimed at persuading voters to support the Conservative party.

He expressed satisfaction with Alexander’s “constructive feedback” and indicated broad agreement with his views on housing taxes, planning, rent controls, and energy efficiency standards.

“I understand and respect his concerns about zero-deposit mortgages,” Findlay said. “As I mentioned in my policy paper, these would be offered only to tenants with a long track record of paying rent and a good credit history. I stand by this proposal because I believe we need bold solutions to the housing crisis. Many renters are currently paying more in rent than they would on a mortgage, and they just need a little assistance to get onto the property ladder.”

In the foreword to his new housing strategy paper, Findlay explained: “Let me tell you why this matters to me. I bought my own house and spent 30 years working hard to pay off the mortgage. But even if my daughter works just as hard for just as long, I’m unsure if she’ll be able to do the same without help from me. That’s not right.

“We must change how the housing market operates. As Conservatives who care about aspiration, let’s commit to fixing it. Aspiration is what I want our party to stand for - a home for every hard worker and the opportunity to own for everyone who puts in the effort.”