No-deposit mortgages have returned to the housing market.
It comes as mortgage rates have hopefully peaked, and have started coming down in anticipation of interest rates being cut soon. However, high house prices mean many first-time buyers will still face issues raising a deposit.
To combat this, lenders are coming up with innovative ways to give first-time buyers a hand on to the property ladder – such as no-deposit mortgages.
These products let borrowers put down a deposit worth less than 5pc of the property value.
It is the first time since the 2008 financial crisis and the days of risky self-certified deals that lenders have released home loans to cater for those with little to no deposit.
Here, Telegraph Money explains how the latest iteration of no-deposit mortgages work.
What are no-deposit mortgages?
House price growth may have been slowing, but values remain high. The average UK house price in May was £285,201, according to the Land Registry.
A first-time buyer with an 80pc loan-to-value (LTV) mortgage looking to purchase a home at the average property price would need a deposit of £57,000 before even thinking about the interest rate.
That can be tough if you don’t have the Bank of Mum and Dad on side – but no-deposit mortgages could help.
The idea is that a borrower puts down a small deposit towards a mortgage, or no deposit at all.
Unlike the years before the financial crisis, when lenders would provide risky mortgages worth 100pc LTV or more, there should be more regulation and affordability checks on a borrower this time round.
Andrew Montlake, managing director at mortgage broker Coreco, said: “One of the biggest issues that prospective borrowers face today is often saving for a deposit, rather than proving affordability overall.
“In an environment where rents are sky high and the cost of living has increased substantially, putting money aside to save is a fantasy for many.
“While the concept of a no-deposit mortgage is by no means a new one, we have not seen them in the mortgage market since the heady days before the credit crunch.”
How do they work?
The latest version of no-deposit products currently on the market are from Skipton Building Society and Yorkshire Building Society.
Skipton Building Society offers a Track Record mortgage aimed exclusively at first-time buyers who are currently renting. An applicant’s record of paying rent is seen as evidence that they can afford monthly mortgage repayments.
No deposit is required to secure the mortgage. Borrowers just need a good credit score, evidence of their income and proof that they have paid rent on time for 12 months.
Alternatively, Yorkshire Building Society’s mortgage deal requires first-time buyers to put down a minimum of just £5,000. The £5k Deposit Mortgage provides home loans on purchases worth up to £500,000, effectively a 99pc loan.
Other options for first-time buyers include mortgages that require a 5pc deposit, some of which may be backed by the mortgage guarantee scheme, while Labour is also planning a different version called Freedom to Buy.
Buyers may also be able to put down a zero deposit through a shared ownership scheme or, in rare cases, using a concessionary mortgage purchase – where a family member or landlords give equity in an existing property as a gift to help fund the deposit.
David Hollingworth, associate director of communications for London & Country Mortgages, said lenders have recognised that the deposit is one of the key challenges for first-time buyers alongside affordability.
He highlighted that while there are also guarantor mortgages, where parents can put down savings as security to back a deposit, the latest products means they don’t have to be involved.
Mr Hollingworth said: “Borrowers will still have to meet affordability requirements, but for the right borrower it could offer an opportunity to buy sooner.”
What are the pros and cons?
The main benefit of a no-deposit mortgage is that it can get you on the property ladder more quickly. You won’t have to spend years saving money towards buying a house, potentially freeing up cash.
Mr Montlake added: “For some it is the difference between potentially ever owning their own home.”
But there are downsides.
Interest rates on loans with low deposits are typically high, especially where no deposit is involved. The interest rate on Skipton’s Track Record Mortgage, for example, is 5.79pc for five years. Similarly, Yorkshire Building Society’s £5k Deposit Mortgage is only available as a five-year fixed rate at 6.79pc.
If you were purchasing the average UK property at £285,201, the Skipton deal would cost £1,801 per month, or £21,612 a year. The monthly repayments would be £1,943 with Yorkshire, or £23,316 annually.
By contrast, the lowest mortgage rate for a 95pc five-year fix as of mid-July was 5.21pc, according to Moneyfacts. The monthly mortgage repayments on the same property would be £1,617 or £19,404 over 12 months – saving a buyer up to £4,000 per year compared with the no-deposit deals.
There is also a higher risk of falling into negative equity with a small or no deposit.
Mr Hollingworth said: “If prices were to slide then the chance of negative equity is higher than for those who have put down a bigger deposit.
“If there’s no need to move and the mortgage remains affordable, then this may not present a major problem, although it will limit mortgage options.”
There are restrictions on no-deposit deals to be aware of as well.
You have to be over age 21 for the Skipton deal and you can only borrow up to £600,000. The Track Record Mortgage also can’t be used on a new-build flat or in Northern Ireland.
Similarly, you can’t use the Yorkshire Building Society deal on a flat or new-build house and it can only be used on purchases worth up to £500,000.
Gary Bush, financial adviser at MortgageShop.com, said: “Sadly, in our opinion the success rate of applicants being accepted by these lenders for these mortgages is mixed/bordering on impossible – with one financial adviser chuckling that ‘even King Charles would struggle to gain agreement to the schemes’.”
How can you get a no-deposit mortgage?
- Decide which deal is right for you
- Consider if it is worth using a mortgage broker
- Apply for a decision in principle
- Get your paperwork and evidence of income and spending ready
- Apply for the mortgage.
You can apply directly for the Skipton and Yorkshire no-deposit mortgages or through a broker.
The Yorkshire Building Society deal is offered through its Accord-intermediary arm. It will give borrowers a decision in principle instantly online that only leaves a “soft footprint” on your credit report, so it won’t affect your credit rating.
Skipton has a Track Record calculator to show how much buyers can borrow, and also lets you get a decision in principle.
There may be an extra fee for using a mortgage broker but they can help prepare your application and check this is the best and most cost-effective and affordable option for you.
You may not need a deposit but you will still need to pass affordability checks and show evidence of your income. This typically means sending three months’ worth of bank statements and payslips to show your earnings and spending.
If applying for the Skipton deal, you will need to show evidence of 12 months of consecutive rental payments over the previous 18 months.
Once you have applied, the lender will check your credit report as well as your paperwork and may take a few weeks to consider your application.
If approved, the lender will ask you to choose when to make the monthly repayment each month and when you would like the loan to start.
Is a no-deposit mortgage right for you?
A no-deposit mortgage may be right for you if you are struggling to generate a big deposit and have a property you are keen to buy that is in your budget. It means you don’t have to save as much toward a deposit and can therefore get on the property ladder quicker.
But it may limit your choice of the type of property you can purchase, and the monthly repayments are likely to be higher than if you save for a bit longer and build a larger deposit.
Mr Montlake said: “These products alone will not solve the issues around home ownership, and some borrowers may not qualify given the fact that prudent lending and affordability rules are still rightly front and centre of this scheme, it is nevertheless a start.
“It shows what forward-thinking lenders can do when they have some innovative flair and a passion for their market.
“While the allure of homeownership with minimal upfront investment is strong, the path of a 99pc or 100pc mortgage requires careful navigation and sound financial advice to ensure it leads to stable and stress-free enjoyment of your new home.”
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