First-time buyers have been offered some new lifelines by lenders to make the jump onto the property ladder.
One of them is a zero-deposit mortgage from Skipton Building Society, which is aimed at renters looking to make the transition to homeownership.
The “track record” mortgage is available to those who can show evidence of a minimum of 12 months of rental history, as well as passing credit and affordability checks.
Rising rents have added to the mix of surging living costs to make it harder for some people to save anything for a deposit – and many people don’t have help from the “bank of mum and dad” to help them raise additional funds.
There are some other “no-deposit” deals on the market – though these often require some additional financial backing though from family members or friends.
David Hollingworth, an associate director at broker L&C Mortgages, explains: “A number of lenders offer deals that can lend as much as 100% of the purchase price, but require the parent to put down some additional security.
“That will usually require them to lock away some cash or put up spare equity in their own home as additional security for the lender.”
Barclays has a “family springboard” mortgage allows people to get on the property ladder with no deposit, but they must have a “helper” who can deposit the equivalent of 10% of the purchase price into a linked savings account.
Halifax has a “family boost” mortgage and Lloyds has a “lend a hand” mortgage, which work in a similar way.
One major advantage of zero-deposit mortgages is that they can accelerate people’s plans to get onto the property ladder.
If a family “helper” is needed to deposit money into savings, they will often earn interest on this cash.
But, there may also be some potential drawbacks or risks, which need careful consideration.
For example, the bigger the deposit someone has, the lower the mortgage rate they will often be offered, so having no deposit could work out more expensive over the course of the mortgage deal.
Hollingworth says: “Getting a deposit together will open up better rates as a general rule.”
There is also the risk when you have little or no deposit of falling into negative equity – that’s when the loan you’ve taken out ends up being worth more than the property. This can happen at times when house prices are falling.
But, Hollingworth points out: “Equally, if prices rise it could help to get on the ladder sooner rather than watching prices edge further away.”
There may also be restrictions on the type of property you can buy, for example the Skipton deal excludes new-build flats.
Borrowers – and their family helpers – should also consider what could happen if they default on the mortgage.
Lenders often state in their rules that savings will be returned with interest after a set period – provided that the borrower has kept up with their payments.
Hollingworth says: “If things went badly wrong and the first-time buyer property was repossessed and sold at a shortfall then the lender could call on that security to cover the outstanding balance.”
Zero-deposit mortgages have come under the spotlight just as the average price tag on a first-time buyer home across Britain has hit a record high of £224,963, according to Rightmove.
Tim Bannister, Rightmove’s property expert, says: “We’re seeing that buyers are spreading their search wider when looking for a home compared with last year and before the pandemic, to find the right home within budget.
“This is something that has become more possible with flexible working arrangements.”
Borrowers also face the hurdles of passing affordability and credit checks in the first place.
In another innovation to help first-time buyers, Leeds Building Society has partnered up with Experian Boost.
This means that some additional regular payments – including subscriptions to digital entertainment services such as Netflix or Spotify – can now contribute to credit scores and be factored into mortgage applications to the Society.
Unfortunately for first-time buyers, the choice of ultra-low deposit mortgage deals has shrunk compared with a year ago.
According to website Moneyfacts, there were 212 5% deposit mortgage products on the market on May 1 2023, down from 369 on May 1 2022.
For people with a 10% deposit, there were 675 products on May 1 2023, down from 692 on May 1 2022.
Richard Donnell, executive director at Zoopla, says: “High loan-to-value mortgages of over 90% have become a small part of the mortgage market, much smaller than in previous decades.
“This is due to lower risk appetite amongst banks but also the impact of regulatory changes in 2015 that saw much tougher testing of housing affordability for new borrowers.
“These changes were designed to stop households taking on too much debt when interest rates fell to record lows.”
Remember, never be afraid to ask questions— Adam Wolfryd, Hamptons
Adam Wolfryd, from estate agent Hamptons in London’s Canary Wharf, suggests that first-time buyers should consider all the incentive schemes available.
Lifetime Isas, for example, help people to save for their first home and the Government adds a bonus to these savings.
He also suggests that first-time buyers sharpen their negotiating skills, for example, by checking whether white goods are included in the sale.
Wolfryd adds: “Remember, never be afraid to ask questions – solicitors, mortgage brokers and the estate agents are all on hand to help guide you through.”
