What do ‘No deposit mortgages’ mean for first-time buyers in 2023?

In the current UK property market, first-time buyers need help accumulating a substantial deposit to get their foot on the property ladder. The number of first-time buyers falling by 11% in 2022 has motivated some mortgage lenders to act on this. In May 2023, Skipton Building Society re-launched its 100% no-deposit mortgages after discontinuing them after the 2008 financial crash.

What is a ‘No deposit’ mortgage?

As the name suggests, a no-deposit mortgage allows borrowers to secure a mortgage without making an initial deposit, which is typically five to ten per cent of the property’s value. Skipton’s ‘Track Record Mortgage’ is specifically designed to help renters, who struggle to save for a deposit, break down the rental cycle and get on the property ladder with more ease. The mortgage has a fixed rate of 5.49% for five years and no fees, with a maximum loan term of 35 years.

Who is eligible?

Anyone aged 21 and over.
Be a first-time buyer.
Good credit score.
No missed payments in the last six months (including rent, car payments, credit cards, phone contract etc.)
Proof of 12 months’ rent paid (The tenants on the current tenancy must be the same as the mortgage)
Proof of household bills being paid for at least 12 months.
Mortgage payment must be equal to or lower than the average rental cost of the last six months. (Meaning: if your rent is £750 per month, your mortgage payment must be equal to or less than £750)
Not available on new build flats.
You can only borrow up to £600,000.
Optional deposit (must be less than 5% of the property’s value).

What are the benefits of a ‘no deposit mortgage’ for first-time buyers?

Increased accessibility: No-deposit mortgages open homeownership opportunities to a broader range of individuals who may not have the means to save a significant deposit. This can be particularly beneficial for first-time buyers and those on lower incomes.

Earlier entry into the property market: By eliminating the need for a deposit, these mortgages allow potential homeowners to enter the market sooner. This can be advantageous in regions with rising property prices, such as London, as buyers can secure a property before costs further escalate. It also helps to break the renting cycle.

Financial flexibility: Without a deposit requirement, buyers can allocate their savings towards other essential expenses related to homeownership, such as moving costs, furnishing, or home improvements. This flexibility can make the transition to homeownership more manageable for many.

What are the drawbacks?

Higher interest rates: Lenders offering no-deposit mortgages often compensate for the increased risk by charging higher interest rates than traditional mortgages. Borrowers should carefully evaluate the long-term cost implications and consider whether the higher interest rates offset the benefit of avoiding the deposit.

More significant borrowing risks: Since no deposit mortgages involve borrowing the entire property value, borrowers may face a higher debt burden and potentially negative equity if property prices decline, which is likely to occur. Mortgage advisors must assess the personal financial stability of clients and ensure they can make mortgage repayments consistently. The risk of negative equity is real if house prices fall; the property will be worth less than the mortgage balance.

Limited options and stricter eligibility criteria: No-deposit mortgages are less widely available than traditional mortgages, and lenders often impose more stringent eligibility criteria. Applicants must typically demonstrate a reliable income, a good credit history, and the ability to afford higher repayments. This may be a challenge for borrowers considering the current cost of living crisis on the back of the pandemic. In the UK, the average personal debt is £33,410. However, with more accessible ways to borrow money with Klarna and Clearpay, UK adults are borrowing money more regularly and slipping into debt easier.

Additional costs: Although the deposit is eliminated, borrowers may encounter additional costs, such as lender's mortgage insurance (LMI), which protects the lender against default. These costs should be factored into the overall affordability assessment.

What about 95% mortgages?

In April 2021, the government launched its 95% mortgage scheme, allowing borrowers to secure a mortgage with a 5% deposit of the purchase price up to £600,000. The scheme is available from most lenders on the high street, such as Barclays and Santander. The primary distinction between a 95% mortgage and a no-deposit mortgage lies in the absence of a deposit requirement and the relatively less stringent credit score criteria for borrowers than the no-deposit option.

Both options share similar drawbacks as they are inherently high-risk, which leads to the limited amount of money (£600,000) being available to borrow. While this may not be a problem for those outside London, this amount does not suffice in London’s property market. In 2022, the average sold price for a property in London was £740, 964.

Another drawback is high-interest rates. Typically, the better your deposit, the better your interest rate. The interest rates are naturally higher since you can put down no deposit or a 5% deposit. With a 20-30% deposit, you could obtain a competitive mortgage with lower interest rates. Additionally, in these types of mortgages, the loan-to-value ratio is high (e.g. 80%, 90%, or more), and lenders may ask you to pay a ‘higher-lending charge’ (HLC).

Are No-deposit mortgages risky investments?

No-deposit mortgages can introduce financial risk in the economy. One of the main concerns is that they can contribute to a rise in housing prices. When individuals can secure mortgages without a deposit, it increases the demand for housing, which can drive up prices. This can create affordability challenges for future homebuyers and potentially lead to housing market bubbles. Additionally, no-deposit mortgages may pose risks to financial institutions as lenders face a higher risk of default if borrowers have no equity stake in the property from the start. In a housing market downturn or economic instability, borrowers with no deposits may be more likely to default on their mortgages, potentially leading to financial instability for both borrowers and lenders. However, regulators and policymakers monitor and regulate mortgage lenders to mitigate these potential risks and stabilise the housing market.

What about the HELP-TO-BUY Scheme?

The scheme is exclusively available to first-time buyers in England (with similar schemes existing in Wales, Scotland, and Northern Ireland), and it specifically applies to the purchase of newly constructed homes. The scheme details vary slightly depending on your location within the country.

Under the equity loan scheme, if you meet the criteria and have a minimum deposit of 5%, the Government will provide you with an interest-free loan for the first five years. The loan amount will be 20% of the purchase price (up to 40% within Greater London), while a mortgage can cover the remaining 75%.

Since you only borrow 75%, you can access more affordable interest rates than a 95% mortgage. However, it's important to note that this arrangement includes a mortgage and an interest-only equity loan.

What can you do to prepare for becoming a first-time buyer?

Note: this article does not constitute financial advice. It is only for information and educational purposes.

There are serval things you can do to prepare for the critical milestone of becoming a first-time home buyer.

Determine a budget: Preparing to purchase your first property can seem overwhelming, but it becomes more manageable with a well-defined and attainable plan. The initial task is to determine the exact amount you need to save.
Start saving early for a deposit or down payment: You can obtain a mortgage without a deposit, but this option may not suit your financial situation. Therefore, you should assess your financial situation to determine how much and how regularly you can save money.
Where to save your deposit? Depending on when you’re planning on purchasing your first home, for example, if you are planning on buying in five years, you may want to consider looking for a longer-term savings account that pays a higher interest rate.
Check your credit score: Clearscore is one example of an online free credit score checker which allows you to check your credit score and credit history. Take steps to improve your credit, such as paying bills on time, reducing debts, and keeping credit card balances low.
Get on the electoral roll: If you’re not registered, it could cause a delay when you apply for credit while the lenders confirm your details some other way. With some lenders, it can even hurt your credit score, and some applications may even be refused.

Katherine Pegg