Zero Deposit Mortgage – is it a good idea?

When news broke that Skipton Building Society was releasing a new no deposit mortgage product, like many others in the Financial Services industry, my first instinct was to wonder what do they think they are playing at? However, once I understood who their target customer is i.e., long term renters unable to get on to the property ladder due to the difficulties of raising a deposit in today’s market, I completely understood what they are doing and why they are doing it.

This sort of innovative product is completely in line with the ethos of a building society. Building societies, while not charitable, exist for a very charitable purpose namely to get people into homes. With a home comes a greater sense of security and a peace of mind in the knowledge that you are building something tangible for yourself and your family. The pursuit of this objective has historically driven building societies to come up with innovative and affordable products that address the needs of certain sectors of the mortgage market; sectors that are not usually well served by more commercial banking interests.

It was good to see the Skipton Chief Executive, Stuart Haire remind Channel 4 News viewers that building societies are not banks. Unlike banks, which exist to generate profits for their shareholders, building societies are mutuals i.e., they are owned by their members who are also their customers and depositors. Profits owned from their operations are distributed to those members.

This ownership model allows building societies to take a more practical approach to managing circumstances where customers may find it difficult to keep up with their mortgage payments. The building society’s approach is aimed at helping people to obtain their own homes and to continue to afford to stay in them.

Building societies, because of their objectives, will usually have a greater risk appetite and a lower expected rate of return than would otherwise be acceptable to a bank.

As a financial service professional, who audits these entities I can immediately see the potential dangers arising from any relaxation in lending criteria. The risk of increases in non-performing loans as a proportion of the portfolio and the resulting erosion of the institution’s capital arising from increased provisions. That said the approach taken by Skipton appears imminently sensible. If people can afford to rent for years (or even decades), in effect paying off their landlord’s buy-to-let mortgage, then surely, they can be trusted to pay a mortgage on their own homes.

As trusted advisors we are often challenged to think outside of the box to arrive at efficient and effective solutions to issues our clients face. Whether it is on corporate finance, tax advice or restructuring and recovery we can appreciate the value of a flexible and innovative approach to addressing customer’s needs.

Building societies have always catered for those segments of the mortgage market left behind by the larger financial institutions. Unfortunately, economic difficulties and the rising cost of living mean that these segments are expanding rapidly. Now more than ever there is a growing need for the kind of innovation demonstrated by Skipton in a mortgage market that appears to be leaving too many would be homeowners behind.

Building Societies should have learnt the lessons of Northern Rock’s collapse during the financial crisis of the early noughties. Affordability is a key focus in the lending criteria, which is as it should be, as is the need to treat customers fairly. If they were not, you could be sure that the regulators would be all over this.

Well done Skipton for offering something new and maintaining the innovative tradition of the UK’s Building Societies. What took you so long?