No deposit mortgages that are ‘life-changing’ for first-time buyers are making a comeback
NO deposit mortgages for first-time buyers are making a comeback.
Buyers can borrow the entire purchase price of the property without having to pay a down payment – but should you take one out? We take a look.
Usually buyers save around 5-10% of the property’s value and use it as a down payment for their mortgage.
But with a no deposit deal – also known as a 100% loan-to-value (LTV) mortgage – a bank lends you the entire cost of your new home.
It can be a huge help to those unable to scrape together a deposit, but may experts have also criticised them after they were axed during the 2008 financial crisis.
Skipton launched a no-deposit mortgage back in 2023, making it the first of its kind in over 15 years.
Today there are 17 different no deposit mortgage options, with some requiring you to put a family member or friend down as a guarantor in case you are unable to make the payments.
Halifax offers a Family Boost deal that lets a family member pay 10% of the purchase price of your home into a 3-year fixed term savings account as security.
The family member will get their savings back, with interest, when the 3-year term ends, as long as repayments are up to date.
This mortgage will then be on a fixed interest rate for three years.
However, you will qualify for the deal if you want to buy a new build property or are using a scheme such as Help to Buy, shared equity, shared ownership, or the Right to Buy scheme.
Barclays runs a similar offer known as the Family Springboard Mortgage.
Skipton Building Society also offers a Track Record mortgage.
The Track Record Mortgage is available to tenants aged 21 and above and for first-time buyer purchases only. It does not require a guarantor
Skipton looks at your track record of paying rent to work out how much you may be able to borrow, and the interest is fixed for the first five years.
IS A NO DEPOSIT MORTGAGE RIGHT FOR YOU?
Nicholas Mendes, mortgage expert at John Charcol, told The Sun no deposit mortgages can be “life-changing” for first-time buyers.
He said: “In today’s market, saving tens of thousands while paying rising rent, bills, and everyday living costs just isn’t realistic for a lot of young people.”
“For first-time buyers, these products can be life changing. They allow people to buy sooner, rather than waiting years to save a deposit — during which time house prices may keep rising”
A cocktail of wage stagnation and rising house prices has made it harder for buyers to get on the ladder, so it’s no surprise the scheme is tempting for many.
WHAT ARE THE RISKS OF A NO DEPOSIT MORTGAGE?
But you should be aware that no deposit mortgages come with a higher risk of falling into negative equity.
This is when your home is worth less than your outstanding mortgage; when this happens, it can be difficult to sell your home or remortgage.
Alice personal finance analyst at Bestinvest by Evelyn Partners, said prospective buyers should be aware of this factor as “house prices may slow in the coming months.”
She predicts this may happen as the relief on stamp duty coming to an end on March 31.
Alice added: “Negative equity traps people into their mortgage, as they effectively have to pay to sell their own home, and it raises the risk of repossession if they cannot keep up with repayments.”
Another factor to consider is that interest rates on no deposit mortgages are higher than offers which require a down payment.
For example, Skipton’s Track Rate Mortgage has a rate of 5.44% for five years.
But even if you can pull together a 5% deposit on a home, you could fix at 4.96% for five years with Lloyds Bank.
Alice said the bigger a deposit a first-time buyer can put down the better.
“This not only secures better rates but also offers some protection if house prices flatline or fall,” she said.
But the expert said an alternative option is to “extend the mortgage term” to 30, 35, or 40 years.
“This is an effective way to lower repayments and ensure a desired home is affordable,” she said.
By doing this buyers can lessen the amount they pay each month, but they will have to pay more in interest charges.
If you want to extend your mortgage you will need to speak to your lender.
What help is out there for first-time buyers?
GETTING on the property ladder can feel like a daunting task but there are schemes out there to help first-time buyers have their own home.
Help to Buy Isa – It’s a tax-free savings account where for every £200 you save, the Government will add an extra £50. But there’s a maximum limit of £3,000 which is paid to your solicitor when you move. These accounts have now closed to new applicants but those who already hold one have until November 2029 to use it.
Help to Buy equity loan – The Government will lend you up to 20% of the home’s value – or 40% in London – after you’ve put down a 5% deposit. The loan is on top of a normal mortgage but it can only be used to buy a new build property.
Lifetime Isa – This is another Government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25% on top.
Shared ownership – Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount. You can buy anything from 25% to 75% of the property but you’re restricted to specific ones.
Mortgage guarantee scheme – The scheme opens to new 95% mortgages from April 19 2021. Applicants can buy their first home with a 5% deposit, it’s eligible for homes up to £600,000.