[Dongeul Dongeul] Buying a Home with No Money Down?… UK Launches 100% LTV Mortgage

100% Loan with No Guarantee for Purchase
Product Disappeared During Global Financial Crisis
UK Eases LTV Limits to Encourage Home Sales
Goal to Foster Middle Class by Saving Monthly Rent

There is a field that attracts great attention from the media and the public whenever real estate policies are announced. It is the upper limit of the loan-to-value (LTV) ratio for mortgage loans. LTV refers to the ratio of the asset value recognized when borrowing money from a bank using a house as collateral.

Since the loan amount that can be borrowed varies depending on the LTV, whether to raise or loosen it is always a matter of keen interest. In Korea, an LTV of 50% is currently applied to regulated areas only for those without homes.

However, recently in the UK, a no-deposit 100% LTV mortgage product has been launched, causing a big sensation. It is surprising to think that one can purchase a house entirely with bank money without putting up any of their own assets. What exactly prompted the UK government to allow such a policy?

A citizen passing in front of a real estate office in London, England.
Photo by Yonhap News

◆Up to 900 million won loan with no deposit... Market attention on unprecedented terms

The 100% LTV mortgage is a product launched by the UK financial institution 'Skipton Building Society.'

To use this product, several conditions must be met. You must currently be renting a home and be a first-time homebuyer. If all these conditions are met, you can borrow money from Skipton with a 35-year term and a fixed interest rate of 5.49% for 5 years.

Skipton Building Society [Image source=The Guardian]

This product was made possible after the UK government announced a mortgage guarantee program for first-time homebuyers in 2021.

The UK government did not specifically set an upper limit on LTV, but statistics showed that first-time homebuyers purchase homes with an average LTV of 82%. Accordingly, the government recommended banks to launch products with an LTV of 95%, which is higher than that. Furthermore, by the end of this year, the government decided to lend up to 40% of the house price with a 25-year term when purchasing newly built homes priced up to 600,000 pounds (973.42 million won).

In other words, first-time buyers can combine government-supported LTV of 40% with bank loans of 55% to borrow up to 95% of the house price. This means that if you have only 5% of the 600,000-pound sale price, which is 48,671,000 won, you can buy a house.

Thanks to this policy, many banks such as NatWest, Santander, and Nationwide began launching mortgage loans with 95% LTV. Subsequently, some banks started offering 100% LTV loan products with guarantors or secured by household savings deposits.

Even in this situation, Skipton's 100% LTV attracted great market attention after its launch. This is because there was no loan product that lent 100% of the house price without any guarantee like Skipton. In the past, there were mortgage products in the UK that lent up to 100% of the house price, but all disappeared after the 2008 global financial crisis.

◆UK government sees rent savings as a ladder to the middle class

So why is the UK so lenient with LTV? Surely, we know that if LTV regulations are too relaxed, excessive borrowing could drive up house prices and cause turmoil in the real estate market.

The reason is that the UK government views home purchases as a means to expand the middle class. Renters in the UK find it difficult to afford buying homes due to rapidly rising house prices. According to The Guardian, the amount paid by first-time homebuyers last year was 64,470 pounds (101.46 million won), an 8% increase from the previous year.

Real estate sale advertisement signs are lined up in a residential area near Queen's Park, UK. [Image source=Bloomberg]

Rent is also rising sharply, making it difficult to save money. According to SpareRoom, a UK real estate rental site, the average monthly rent in London in the first quarter of this year was 952 pounds (1,546,500 won), a 20% increase from the previous year. Rent in the outskirts of London reached 598 pounds (950,000 won).

Given this situation, the UK government judged that tenants need to save on rent and purchase homes to climb the social ladder and become middle class.

◆Risk of asset loss if real estate crashes... Voices of warning

However, some voices criticize the 100% LTV loans. If real estate prices crash, homeowners who purchased homes entirely with bank money are likely to suffer huge losses.

Andrew Bailey, Governor of the Bank of England. [Photo by Yonhap News]

Andrew Bailey, Governor of the Bank of England, also expressed concerns about this issue and warned to be cautious about 100% LTV loans. In an interview with the BBC on the 12th of last month, Governor Bailey said, "We will not regulate 100% mortgages, but all borrowers should be careful," adding, "They could end up holding unsold homes and paying off loans for a long time."

Will the 100% LTV mortgage truly become a ladder for tenants as the UK government expects? Or will it become a trap that pushes them into another crisis? The direction of the UK real estate market is drawing keen attention.