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Deposit-free mortgages are back after a 15-year-long absence from the market that stretches back to the financial crisis.
While some have cheered the rebirth of no-deposit mortgages to help those without access to the Bank of Mum and Dad, holes are already emerging in the scheme with fears it will only really help people in some parts of the country and not where the housing crisis is most acute.
So how will 100pc mortgages work, and who can really benefit from them in today’s housing market? Use our calculator below to see how much you could borrow.
With fewer people taking out mortgages, rents spiralling, interest rates up and house prices still out of reach for many, getting on Britain’s housing ladder has never felt harder.
For lenders, this landscape means coming up with fresh incentives for first-time buyers to buoy their loan books with more profitable customers.
Earlier this year, Skipton Building Society launched the Track Record mortgage, and became the first lender since 2008 to re-introduce mortgages which don’t require a buyer to have a deposit. The idea is to help people who have proved they can pay their rent but do not have access to the large sums needed for a deposit.
Who really benefits from 100pc mortgages?
Experts have highlighted, however, that the product is “niche” in scope, only really working for those who live in the north of England where house prices are lower, and where borrowers earn between £40,000 and £60,000.
Richard Donnell, executive research director at Zoopla, the property portal, said: “Ultimately, the product will help middle-income households. It’s not really going to help a big proportion of first-time buyers.
“It works where house prices are low, but the product is unaffordable in areas where house prices are high. It’s going to help people buy smaller, more affordable homes more quickly.
“Very limited housing stock and high rents will mean this product is the right decision for some, but certainly not all.”
Meanwhile, some brokers are concerned the product launch is “oddly timed” with house prices still set to fall this year and credit crunches on the horizon in wider Europe and the US.
Skipton does warn on its website that those with little or no deposit are at “a higher risk” of negative equity, which is when a borrower owes more on their mortgage than their home is worth. This is especially a risk when house prices dip.
Who is eligible?
You have to be aged 21 or over, a first-time buyer, have less than the equivalent of a 5pc deposit in savings, no missed debt or credit payments – such as a phone bill – over the past six months, and at least 12 months evidence of on-time rent payments.
You must have no missed payments on debts or credit commitments in the last six months, and you can’t be looking to buy a new-build flat.
Customers can borrow up to £600,000, but what they can borrow also depends on their income and current interest rates which have to be “stress tested” in case they rise further.
Mr Donnell of Zoopla calculated that in north-east England, borrowers would need an income of £38,000 – or £19,000 each if in a couple – to qualify for a deposit-free mortgage on the average property in the area, worth £107,869.
That would put properties like this two-bedroom detached bungalow in Peterlee, County Durham, on sale for £107,500 with I Go Move, into reach.
But in the south east, you would need a whopping £138,750 income to buy the average home, at £307,447. If this income was spread across a couple, this would still equate to a £69,375 salary each.
At that figure, a buyer could afford this two-bedroom modern flat in Ashford, Kent, near the railway station with high-speed trains to the Continent, currently on the market at £307,500 with Hunters, the estate agent.
Since 2015, new rules have required interest rates to be stressed and lenders to hold more capital to ensure households do not take on unsustainable debt.
“Mortgage stress rate and loan-to-income limits are what’s stopping people on lower incomes from owning a house – whether they have a deposit or not,” Mr Donnell said
“This has prevented a boom and bust market, but it’s excluded people from the market in the process because now they need equity to get on the ladder.”
Skipton said it will base people’s mortgage repayments on their current rental payments. It uses the example of £1,290 in rent, the national average according to data from Hamptons – part of Skipton’s estate agency arm.
This allows a first-time buyer to consider homes up to £240,510, however the average UK property is now worth £286,896 according to Halifax.
If an individual buyer paying £800 per month in rent wanted to use the product, they would need to consider houses with values of no higher than £149,153.
The product is therefore encouraging first-time buyers to invest in smaller, more affordable properties. However, Mr Donnell said Zoopla was typically seeing first-time buyers invest in larger and more properties than the ones they rent in a bid to insulate themselves from negative equity over the short-term.
Risk of negative equity
Mortgages where lenders loan 95pc of a house’s value, the most leveraged mortgages on offer for the past 15 years, have all but disappeared now due to lenders’ waning appetite for risk. In 2008, nearly 6pc of all mortgages were loaned to people with a 5pc deposit, but now this cohort of borrowers makes up just 0.27pc of all mortgages loaned, according to Financial Conduct Authority data.
This is why Mr Donnell reckons Skipton’s new deposit-free mortgage is “a niche product” at best. “It’s getting a lot of headlines, but it’s important to send a message that this isn’t going to be a mainstream product, even for Skipton.”
Skipton itself has said it anticipates high demand for the deal and warned that it may sell out quickly.
Jamie Lennox, director of Dimora Mortgages, said a deposit-free mortgage “seems oddly timed while there is such uncertainty around the outlook for the housing market and what will happen with house prices.
“Many will have flashbacks to the 100pc mortgages available back in 2008,” said Mr Lennox.
Although Mr Lennox, like other brokers, is confident the criteria for this product will be far tighter around credit history and affordability than historic versions.
David Hollingworth, a director of brokerage L&C Mortgages, said deposit-free mortgages “feel like something of a ‘back to the future’ moment”.
He added: “There will always be concerns that no deposit could risk negative equity but this is a longer term product for that reason and if it can help some accelerate the move from renting to home ownership it could be a significant new product.”
Skipton’s calculator is based on a mortgage term of 35 years. The number of first-time buyers taking out ultra-long mortgages has more than doubled since the beginning of last year, according to UK Finance.
Extending the term allows a borrower to immediately reduce their monthly repayments, which many feel is necessary following a rise in both interest rates and energy bills.
This article was first published on May 12 2023 and has since been updated.