The return of deposit-free mortgages: should you apply?

Tenants have a chance to escape the “rental trap” with the return of zero-deposit mortgages.

Before the 2008 financial crisis, explained The Times Money Mentor, 100% loan-to-value (LTV) and self-certified mortgages were not unusual, but they have “disappeared from the market” as lending rules have tightened.

Nowadays, added This Is Money, most 100% mortgages available are based on a guarantor system “where a family member or friend who owns their own home is named on your mortgage”.

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But Skipton Building Society has unveiled a zero-deposit home loan called the “track record” mortgage aimed at renters that does not require family support, “the first since the 2008 financial crisis”, said The Guardian.

The lender said it is looking to help tenants who feel “trapped in the rental cycle”, highlighting that Office for National Statistics data shows house prices for first-time buyers have risen by an average of 18% in the past two years, making it increasingly difficult to get onto the property ladder.

Charlotte Harrison, chief executive of home financing at Skipton, said there is “a clear gap in the market” for prospective buyers who have a good history of paying rent on time but lack “savings or access to family wealth”.

Other lenders could follow suit in the coming months and years, said The Times, so here is what you should consider if you are thinking of applying for a zero-deposit mortgage.

How a 100% LTV mortgage works

Most standard mortgages require the borrower to put down at least a 5% deposit. A 100% LTV mortgage – or a zero-deposit mortgage – allows buyers to purchase a home without paying any deposit, explained The Sun, “but they can come with extra fees”.

Since the 2008 financial crash, banks and building societies have become a lot stricter when it comes to offering 100% mortgages, the newspaper website added. Before Skipton’s latest launch, the main zero-deposit choice was “a handful of niche 100% loan-to-value guarantor or family deposit mortgages”.

Who can get a deposit-free mortgage?

Most zero-deposit mortgages are typically aimed at first-time buyers, and different lenders will have their own criteria.

Skipton’s “track record” product is only available to first-time buyers aged 21 or over. It lets borrowers bypass standard deposit requirements by providing their rental payment history, explained MoneyWeek.

The maximum amount renters can borrow “will depend on their credit score, evidence of making their rent on time for the last 12 months and their income, with an absolute maximum of £600,000”, the financial website said.

To see how much you can borrow, use Skipton’s “track record” calculator.

Skipton said the monthly mortgage payment for each applicant should not be more than the average of their past six months’ rental costs.

This may limit some people though, the Daily Mirror warned. For example, if you pay £1,000 a month in rent, you would only be able to borrow around £163,000, depending on affordability checks.

This mortgage might not actually be much help, added MoneySavingExpert. The average first-time buyer property costs £238,000, according to the latest UK House Price Index, “and you’d need to be paying more than £1,300 a month in rent to borrow this much,” the financial website said.

Is the zero-deposit mortgage competitive?

This type of product “serves a part of the market that has recently been wholly reliant on help from the Bank of Mum and Dad”, said David Hollingworth, from the mortgage broker L&C Mortgages, in MoneyWeek.

However, “at 5.49% for five years the interest rate for Skipton’s loan is more expensive than the average five-year fix of 5%”, said MoneyWeek. Plus, the loan won’t “solve all the difficulties for all first-time buyers”, Hollingworth said, as they still need to pass Skipton’s affordability tests.

“There’s another rub,” said the Financial Times. “Research suggests that in most regions of the UK, the mortgage equivalent to your monthly rent would not enable you to buy the type of home you are currently renting. You would need to find somewhere lower-priced to make the sums work.”

Five-year fixes are cheaper if you can push to a 5% deposit, mortgage broker Aaron Strutt told the FT. “At a time when banks are competing hard for new business, however, Skipton’s move may bring others into the 100% market”, the paper added.

How risky is a 100% LTV mortgage?

One possible downside of a 100% LTV mortgage is that it can increase the risk of negative equity, said The Times Money Mentor. This is when a property’s value falls to below that of the loan. If a buyer never paid a deposit in the first place, “the amount of equity they have is even lower”.

House prices are beginning to fall, raising the risk of negative equity. This could create problems for both buyers and lenders as “homeowners won’t be able to sell and banks will be stuck with properties that are worth less than the loan – raising the threat of another potential crash,” the website said.

Despite this risk, the return of the 100% mortgage was applauded by most brokers, added the FT, “even as they acknowledged the historic impact of loose lending practices on those who overextended themselves before the financial crisis”. This time things are different, brokers have suggested, because regulators have “overhauled the safeguards on mortgage affordability”.

What are the alternatives?

Similar loans are already available from certain lenders, said MoneyWeek, but all require some type of guarantee from family members. These are essentially “family-assisted mortgages” that lend as much as 100% of the property’s purchase price and require additional security from a guarantor.

This can require locking cash away in a dedicated savings account for a set period of time or taking equity in the parental home, so usually they will “only be an option available to those with well-off families”, said The Guardian.

There are also some government schemes that help you buy a property if you are able to save a small deposit. The government’s Mortgage Guarantee Scheme lets first-time buyers and home-movers purchase a property with just a 5% deposit.

First Homes helps local first-time buyers and key workers buy a home at a 30% discount to its market price, while shared ownership enables people to buy a share in a property and pay rent on the rest while gradually building up their own equity.

Marc Shoffman is an award-winning freelance journalist, specialising in business, property and personal finance. He has a master’s degree in financial journalism from City University and has previously written for FTAdviser, ThisIsMoney, The Mail on Sunday and MoneyWeek.