Home buyers are being offered the chance to purchase a home with no deposit, as a little-known lender has launched a 100 per cent mortgage deal.
It is being offered by lender April Mortgages – the same lender that offers up to seven times annual income on some mortgages.
Buyers who want to take advantage of its new no-deposit product, however, will be limited to borrowing no more than 4.49 their annual income.
This means someone earning £40,000 a year could hypothetically buy a home worth £179,600 even without any savings.
However, they will need to be able to make the mortgage repayments – which will be higher than if they had put down a deposit. They will also need some cash to pay for legal fees, a surveyor and stamp duty, if their purchase incurs it.
April also requires a minimum income of £24,000 to get the 100 per cent mortgage, and borrowers will also need to fix for either 10 years or 15 years – much longer than the normal two or five year products most people sign up to.
On the ladder: The new mortgage could help first-time buyers who don’t have family help – but not putting down a deposit will make their monthly payments higher
What is the interest rate on a 100% mortgage?
The interest rate initially starts at 5.99 per cent. On a £200,000 mortgage being repaid over a 25 year term that would mean paying £1,288 per month.
To put that in perspective, someone putting down a 5 per cent deposit could get a rate as low a 4.79 per cent, with Nationwide Building Society. They would only need to fix for five years, though the deal comes with a £999 fee.
On a £200,000 mortgage being repaid over a 25 year term that would amount to £1,145 a month.
April has tried to make its higher rate more attractive by offering an automatic rate reduction over time, as people pay down the debt and the loan-to-value reduces.
It says there are no early repayment charges when moving home or repaying in full using personal funds.
However, borrowers will be subjected to an early repayment charge if they switch to a different lender during the fixed term period.
James Pagan, director of product at April Mortgages, said the no-deposit deal was designed for credit-worthy buyers who can clearly afford monthly repayments but lack access to upfront capital – particularly those without help from the Bank of Mum and Dad.
He said: ‘Saving for a deposit remains one of the biggest barriers to home ownership, even for those with strong incomes and a solid credit profile.
‘We believe the answer lies not in loosening standards, but in designing products that better reflect the realities of today’s housing market.
‘Our new no deposit mortgage brings together full credit and affordability checks with the longer-term certainty of a 10 or 15-year fixed rate.
‘It’s a responsible option for borrowers with strong financial track records who are excluded by traditional deposit requirements.’
However, borrowers should think carefully about taking this kind of mortgage, and whether biding their time to save even a small deposit could save them more money and give them greater security in the long run.
Risky move? Some mortgage experts warn against allowing borrowers to take bigger loans
David Hollingworth, associate director at the broker L&C Mortgages said: ‘Borrowers will need to evidence their ability to meet mortgage payments.
‘In addition, they should think about the higher potential for negative equity if property prices were to fall.
‘Negative equity becomes a problem for those that need to sell, crystallising any loss. The stability of a fixed rate will provide shelter from fluctuating interest rates, which could help them ride out a dip in prices.’
However, for some mortgage experts, zero-deposit lending brings back memories of looser mortgage lending practices which led to shocks for some homeowners during the financial crisis.
Emma Jones, managing director at specialist mortgage broker When The Bank Says No told the news agency, Newspage: ‘We have to sit back and reflect on what’s happening at the moment.
‘Lenders are lending more and the Government is encouraging regulators to let them lend more.
‘Those who experienced the global financial crisis might be wondering whether history will soon repeat itself.’
What are the alternatives?
There are some other small or no-deposit deals currently on the market.
However, most require either a guarantor, some form of collateral security (for example from a parent’s property) or a cash deposit to be held with the lender for a period of time.
For example, Halifax’s Family Boost mortgage allows a family member to put 10 per cent of a home’s purchase price into a three-year fixed savings account as security, which allows the borrower to get a three-year fixed rate mortgage with no deposit.
They get their savings back, with interest, when the three-year term ends, as long as repayments are up to date. Only the first-time buyer has their name on the mortgage and they legally own the property.
Yorkshire Building Society’s Accord Mortgages, also has a mortgage that can offer up to 99 per cent of the purchase price.
This mortgage requires a minimum £5,000 deposit and is available on properties up to £500,000. That could equate to as little as 1 per cent of the purchase price.
It is only available on houses, not flats, and excludes new build properties. At least one applicant must be a first-time buyer.
The new no deposit option from April Mortgages avoids the need for any family help.
Mortgage brokers think this could prompt other lenders to start offering similar products – and perhaps even offering more than the purchase price.
This was common pre-financial crisis, often pitched as a way to allow first-time buyers to borrow the cash to buy things such as furniture and kitchen appliances, alongside their mortgage.
Riz Malik, Director at R3 Wealth, said: ‘There will be more lenders entering the 100 per cent loan-to-value bracket as the housing market continues to show resilience.
‘Lenders want to lend and they will find new or old ways to do that. You could be forgiven for thinking we are back in the early 2000s. Will there be a lender offering over 100 per cent by the end of the year?’
