Zero-deposit mortgages grow as more first-time buyers struggle to save
More first-time buyers are turning to mortgages requiring little or no deposit, offering another route onto the property ladder but bringing higher borrowing costs and greater fina
By BBC News
A growing number of first-time buyers are purchasing homes with little or no deposit as mortgage lenders expand the range of high loan-to-value deals available.
Figures from the Bank of England show the proportion of UK mortgages requiring deposits of less than 10% is at its highest level since 2008, reflecting attempts by lenders to reach buyers who can afford monthly repayments but struggle to build a substantial deposit.
The development is particularly significant for younger buyers facing high rents while trying to save enough to purchase their first home.
Several major lenders now offer mortgages covering 95% or more of a property’s purchase price, while some products allow eligible first-time buyers to borrow the entire amount.
Skipton Building Society’s Track Record Mortgage, for example, can provide up to 100% of the value of a property without requiring a traditional cash deposit.
It is designed primarily for renters who can demonstrate that they have consistently met their housing costs but have been unable to accumulate the deposit normally required to buy.
The opportunity comes at a price.
High loan-to-value mortgages generally carry higher interest rates than products available to buyers putting down larger deposits, while lenders impose affordability and eligibility requirements to control their exposure to risk.
One couple using Skipton’s mortgage recently bought a four-bedroom home in Swinton for £242,000 without putting down a deposit.
Conroy and Amber secured a five-year fixed rate of 5.33% over a 25-year mortgage term, leaving them with monthly repayments of around £1,500.
They plan to make mortgage overpayments during the first five years to reduce the outstanding balance and build equity in their home more quickly.
Another couple, Bronya and George, used a small deposit rather than putting all of their available savings into their purchase.
They bought a four-bedroom property in Rhuddlan, North Wales, with a £258,000 mortgage covering approximately 98% of its value.
After contributing a £5,000 deposit, they secured a five-year fixed mortgage at 5.89%.
The couple decided to retain some of their savings for renovation work rather than using the money to increase their deposit.
For buyers considering a similar approach, one of the most important risks is negative equity.
This occurs when the outstanding mortgage becomes greater than the value of the property. A buyer borrowing 100% of a home’s value has effectively no equity at the outset, so even a relatively small fall in property prices could initially leave them owing more than the property is worth.
That may not necessarily create an immediate problem for somebody who can continue making their mortgage payments and intends to remain in the property for many years.
It can become more significant if the homeowner needs to sell, move or refinance while in negative equity.
Borrowing a larger proportion of a property’s value can also mean paying more interest over the life of the mortgage.
The increased availability of low-deposit lending has inevitably drawn comparisons with the period before the 2008 financial crisis, when high loan-to-value mortgages were widely available.
However, mortgage affordability requirements are now considerably different, and lenders offering the latest products impose specific conditions on applicants.
Skipton’s zero-deposit product, for example, requires applicants to demonstrate a record of making rental payments and meeting other credit commitments.
Other lenders including Lloyds, Santander and Yorkshire Building Society have also expanded options aimed at buyers with relatively small deposits.
The products address a persistent difficulty in the housing market: some renters can demonstrate that they can meet substantial monthly housing costs but find it difficult to save tens of thousands of pounds while simultaneously paying rent and other household bills.
Although the average first-time buyer deposit remains around 20%, the increasing availability of 95% and 100% mortgages means having such a large deposit is no longer the only route into home ownership.
Buyers considering these products still need to look beyond the size of the deposit.
The mortgage rate, monthly repayment, fees, affordability if household circumstances change and the rate available when an initial fixed period ends can all have a substantial effect on the long-term cost.
A low or zero-deposit mortgage can therefore remove one of the biggest barriers to purchasing a first home, but it does not remove the financial risks associated with taking on a large mortgage.