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Deposit-free mortgage – is it worth it?
A UK building society has launched a deposit-free mortgage option. This is specifically being aimed at those currently renting and people struggling to get on the property ladder.
Skipton Building Society has said that although the new deal requires 12 months of on-time rental payments, it does not require a guarantor. A good credit history is also a requirement, however other deposit-free mortgage deals also need the financial backing of family or friends. This does not.
But what’s the catch?
Well, the interest rate on mortgage repayments is 5.49% – more than the average 5% for a five-year fixed rate mortgage.
There are currently 15 zero-deposit products available. This is just under 0.3% of the UK market.
A huge roadblock for many trying to get onto the property ladder is trying to save enough for a deposit. Another problem faced by those wanting to buy for the first time is being able to find a property that is within budget and affordable.
Rent increases within the last year have made it ever difficult for renters to save money for a deposit, and for many, buying a home at all seems totally out of the realm of possibility. Although Lifetime ISAs (LISAs) are available for those wanting to save for a home, the original Help to Buy scheme, launched by the government, is no longer an option.
The Help to Buy scheme consisted of the Treasury lending homebuyers anywhere from 5% to 20% of the cost of a newly built home – increasing to up to 40% in London. This closed in October 2022.
According to Skipton Building Society, eight in 10 tenants feel “trapped” in the rental cycle. 35% of renters also said they were now struggling to save towards a deposit due to increased rents, with many having to find as much as £1,000 extra a year for their landlords.
“We need to tackle the UK’s housing affordability crisis to enable more people, especially renters who are trapped in renting cycles, to buy their first home.
“People trapped in renting is one of the UK’s biggest housing challenges, having a massive impact on the fabric of our society. With escalating rents and the cost-of-living squeeze further impacting people’s ability to save for a house deposit – it’s making it almost impossible for people get onto the property ladder.
“We recognise there’s a clear gap in the market for people who have a strong history of making rental payments over a period of time so can evidence affordability of a mortgage – but there is currently no solution for them to buy a property due to lack of savings or access to family wealth. It is time for a re-think on these massive barriers to home ownership, and we’re proud to take the lead on bringing to the market, solutions for such a massive social problem.”
However, zero-deposit mortgages are not welcomed by everyone. They are seen as riskier mortgage options, with a high loan to value. These types of loans were a root cause of the 2008 financial crash.
Economists have warned that lending to people as young as 21 years old, with very little credit history could lead to negative equity for borrowers. This is especially the case at a time when house prices are under pressure.
“I’m not happy about 100% mortgages. They just burden people with way too much debt and easily put them into a negative equity situation. We are currently at a stage where house prices look like they might start to drop so someone with a 100% mortgage would go into negative equity within months of buying their place if prices did drop in the next month or so. Back in 2008 when the financial crash started there were a lot of people with 100% mortgages – even 120%! – and that was part of the problem.”