UK Deposit-Free Mortgages-Diverse Investment Opportunities

Skipton Building Society has taken a bold step in addressing the UK's housing affordability crisis by launching the country's first deposit-free mortgage. This innovative mortgage product, called the "Track Record Mortgage," aims to help renters and first-time buyers escape the rental cycle and get on the property ladder.

Recognizing a gap in the market, Skipton's new mortgage allows renters to borrow up to 100% of a property's value without needing a deposit or guarantor. The mortgage is designed for people aged 21 and above, exclusively targeting first-time buyers who can provide evidence of affordability and a good 12-month rental history. According to Skipton, there are 4.6 million households renting privately across England, more than double the number recorded in 2000.

Skipton's research found that 80% of tenants feel trapped in the rental cycle, paying higher rental costs than a mortgage, which prevents them from saving for a deposit to buy their own home. Additionally, house prices for first-time buyers have risen by an average of 18% in the last two years, an increase of £39,680, with more than one in three (35%) struggling to save due to increased rent.

Charlotte Harrison, CEO of Home Financing at Skipton, emphasizes the importance of tackling the UK's housing affordability crisis to enable more people, particularly renters, to buy their first home. With escalating rents and the cost-of-living squeeze further impacting people's ability to save for a house deposit, Skipton has identified a clear market gap for people who have a strong history of making rental payments and can afford a mortgage but lack the savings or family wealth needed to buy a property.

The Track Record Mortgage aims to address these barriers to homeownership by offering a five-year fixed rate mortgage without a deposit. However, some concerns have been raised about the risks associated with such a mortgage. Graham Cox, founder of mortgage advice service Self Employed Mortgage Hub, warns of the "grave danger" that borrowers will overextend themselves, potentially resulting in negative equity if house prices fall.

To mitigate this risk, rigorous stress tests will be required, according to Andrew Wishart, Senior Economist at Capital Economics. He points out that the maximum people can borrow could be less than with other mortgages, meaning that the gap between the house price the buyer aspires to purchase and the amount they can borrow could be particularly large.

Another concern is the structural problem in the British housing market, characterized by a severe shortage of properties available for first-time buyers, as noted by Jonathan Long, head of corporate real estate at Investec. Additionally, campaign group Generation Rent emphasizes the need for more affordable houses to effectively help first-time buyers.

Despite these concerns, Skipton's Track Record Mortgage offers a potential lifeline for many trapped in the rental cycle. This pioneering move by Skipton Building Society signals a re-think on the barriers to homeownership and presents an opportunity for other financial institutions to explore innovative solutions that address the UK's housing affordability crisis.
In the current environment of deposit-free mortgages, rising house prices, and challenges for first-time buyers, investors should consider a diverse range of investment opportunities to capitalize on the evolving market.

Short-term investments:
Short-term investments typically have a time horizon of one year or less. In the current scenario, investors can consider the following short-term strategies:
a. Money Market Funds: These are low-risk investments that invest in short-term, high-quality debt securities such as government bonds or treasury bills. They provide liquidity and capital preservation, making them a suitable option for investors seeking stability in uncertain markets.

b. Certificate of Deposits (CDs): CDs are time deposits offered by banks with a fixed maturity date and interest rate. They are considered low-risk investments and can be an attractive option for those seeking short-term, secure returns.

Long-term investments:
Long-term investments are designed for a time horizon of more than one year. In this context, investors can explore:
a. Dividend-paying stocks: Investing in companies with a strong history of dividend payments can provide a steady income stream and potential capital appreciation. For example, large-cap companies like Unilever, Procter & Gamble, or Johnson & Johnson have consistently paid dividends and demonstrated long-term growth.

b. Growth stocks: These are companies with high potential for revenue and earnings growth. Investors can look for growth stocks in sectors like technology, healthcare, or renewable energy. Examples include Alphabet, Amazon, or Tesla, which have shown impressive growth rates in recent years.

Bonds:
Bonds are fixed-income investments that pay periodic interest and return the principal upon maturity. They can be a good option for investors seeking relatively stable returns and lower risk compared to equities. In the current environment, consider:
a. Corporate Bonds: Issued by companies to raise capital, corporate bonds can offer higher yields compared to government bonds. Investors can look for investment-grade bonds from companies with strong financials to minimize credit risk.

b. Municipal Bonds: Issued by local governments, municipal bonds can provide tax-free income, making them attractive for investors in higher tax brackets. They typically carry lower default risk than corporate bonds.

Real Estate:
Real estate investments can offer diversification, income generation, and potential capital appreciation. In the context of deposit-free mortgages, investors can explore:
a. Real Estate Investment Trusts (REITs): REITs own and manage income-generating properties and distribute the majority of their income to shareholders as dividends. By investing in REITs, investors can gain exposure to real estate without directly owning property. Examples of well-performing REITs include Equity Residential, Simon Property Group, and Prologis.

b. Rental Properties: With a growing number of renters struggling to buy their first home, rental properties can provide a stable income source. Investors can consider purchasing properties in high-demand areas with strong rental yields.

ETFs:
Exchange-Traded Funds (ETFs) are investment funds that hold a basket of assets and trade on stock exchanges. They offer diversification, cost-efficiency, and liquidity. In the current market, investors can explore:
a. Sector-specific ETFs: Investors can gain exposure to specific sectors by investing in ETFs that focus on industries like technology, healthcare, or financials. Examples include Technology Select Sector SPDR Fund (XLK), Vanguard Health Care ETF (VHT), or Financial Select Sector SPDR Fund (XLF).

b. Fixed Income ETFs: For those looking to invest in bonds, fixed income ETFs can provide diversified exposure to different types of bonds, such as government, corporate,

or municipal bonds. Some popular fixed income ETFs include iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), iShares U.S. Treasury Bond ETF (GOVT), and iShares National Muni Bond ETF (MUB).

c. Real Estate ETFs: Investors seeking exposure to the real estate market can consider real estate ETFs, which primarily invest in REITs or real estate-related stocks. Examples include Vanguard Real Estate ETF (VNQ) and iShares U.S. Real Estate ETF (IYR).

d. Dividend ETFs: To capitalize on dividend-paying stocks, investors can choose dividend-focused ETFs that target companies with strong dividend histories or attractive yields. Some popular dividend ETFs are Vanguard Dividend Appreciation ETF (VIG) and iShares Select Dividend ETF (DVY).