Be careful with 100% mortgages, homebuyers told

Buyers and banks need to be "very careful" with 100% mortgages that have no deposit requirement, the Bank of England has warned.

Andrew Bailey, its governor, said "quite a few problems" could arise from such deals which some see as riskier.

This week Skipton Building Society became the latest lender to offer a deposit-free mortgage aimed at first-time buyers currently renting.

Mr Bailey's warning came after the Bank raised interest rates again.

The increase - from 4.25% to 4.5% - was the 12th in a row, and means some mortgage holders will see an immediate increase in their repayments.

The Bank has been trying to control inflation - the rate at which prices rise - which is currently near a 40-year high and putting pressure on families.

However, after its decision on Thursday the Bank warned that price rises were likely to remain higher for longer due to soaring food costs.

• Warning prices to be higher for longer as rates rise

Skipton's latest 100% mortgage requires borrowers to show they have had 12 months of on-time rental payments and a good credit history.

Unlike the handful of other no-deposit deals it offers, the deal does not need a guarantor, such as a family member.

Skipton said it had spotted a "gap in the market" as rapidly rising rents and the cost of living made it increasingly difficult for first-time buyers to save for a deposit.

The government's flagship Help to Buy scheme, aimed at helping first-time buyers, is no longer open.

However, zero deposit mortgages have been seen as riskier loans, and were one of the contributing factors behind the 2008 financial crisis, when many borrowers found themselves unable to afford their repayments.

"I think we have to watch it very carefully," Mr Bailey told the BBC when asked about the return of 100% deals.

He added that the risks needed to be well assessed by both lenders and borrowers.

"I'm not going to say no to 100% mortgages but both lenders and borrowers have to be very careful about this," he added.

"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."

Currently there are 15 other zero-deposit products on the market, according to financial data firm Moneyfacts, accounting for just under 0.3% of the UK market.

The rate for Skipton's latest 100% deal is 5.49%, which is more expensive than its current average five-year fixed deal of 5%.

Some borrowers have been struggling as rising interest rates have driven up mortgage costs.

Cheryl in Bromley, Greater London, told the BBC the rate rises last year led to her having to sell her house and move back in with her parents as she was unable to afford the mortgage.

"I lived with my daughter and couldn't provide a roof over her head," the 43-year-old added. "She had to go live with her father and I found myself back at my parents' house."

On Thursday, Mr Bailey said he was more optimistic about how quickly the UK economy would grow this year.

He added that the country was likely to avoid a recession, which is when the economy shrinks for two three-month periods in a row.