New Deposit-Free Mortgage Could Help Renters Buy First Home

16 May 2023 – A new deposit-free mortgage has been released that aims at helping renters to get onto the property ladder who aren’t able to save up for a deposit.

Rents are at record high and continue to rise, which makes owning a home a compelling option. But property prices have also risen sharply in the past few years and the cost-of-living crisis makes it difficult for many would-be first-time buyers to save up for a deposit.

Now the Skipton Building Society is coming to renters’ rescue by introducing the first 100% mortgage since 2008.

This deposit-free mortgage aims at helping those renters onto the property ladder, who were unable to build-up savings for a deposit. While this is good news for wannabe first-time buyers, experts have warned that there are risks involved that need to be considered.

Skipton’s Deposit-Free Mortgage Only Available For Renters

The last time we have seen 100% mortgages for which no deposits were required was before the financial crash in 2008. And many have blamed such mortgages as a contributor to the crash, which is why some warn against the risks involved in such loans.

However, Skipton attaches a number of restrictions to the new mortgage offer, which should mitigate some of the risks critics are warning about.

Applicants have to be 21 years of age or above, and they have to be first-time buyers. Furthermore, only renters can access the new mortgage deal, who have been renting for at least 12 consecutive months within the past 18 months.

To prove the applicants are able to repay the mortgage, they have to show evidence that they have paid all their rental payments on time during this time. The same also applies to any household bills, including energy bills and council tax.

Other repayment commitments renters might have, such as streaming subscriptions or mobile phone repayments, also have to be up-to-date for the past six months. Any defaults would rule out an applicant.

These conditions aim at ensuring that anyone applying for the mortgage is able to make the repayments and are in place to reduce the risks associated with that type of mortgage.

[…] Skipton Building Society’s criteria of requiring a good rental track record to prove someone can make mortgage payments is sensible, and so I cautiously welcome it, done carefully, after advice, as an option for some.

Martin Lewis, Founder of MoneySavingExpert.com

Applicants who want to buy a new-built flat are not eligible for Skipton’s new deposit-free mortgage.

Monthly Mortgage Payments Can’t Exceed Monthly Rent

Like other fixed-rate mortgages, the 100% mortgage has a fixed interest rate, which is fixed for 5 years and runs for 25 years. However, unlike other mortgage offers, with the deposit-free loan, the amount you can borrow is calculated based on monthly rent payments.

Ordinarily, the amount an applicant can borrow depends on their income and outgoings. But with the 100% mortgage the monthly mortgage payments can’t exceed the monthly rent payments.

This means a renter who pays £1,000 per month in rent, can borrow a maximum of £163,000. However, the applicant also has to pass the building society’s affordability tests. This means Skipton might decide not to lend as much as the maximum amount based on the monthly rent.

The maximum amount that can be borrowed with the 100% deposit is £600,000.

Because the lending amount is calculated based on the rent rather than income, the mortgage offer might not help renters in more expensive areas. According to Rightmove’s House Price Index for April, the average house price last month was £224,963.

To be able to borrow this amount, a renter has to pay a monthly rent of over £1,250 on their current rental property.

100% Mortgage More Expensive And More Risks Attached

While a deposit-free mortgage is great for renters that can’t afford to save up for a deposit, it will cost more than mortgages that require a deposit, with 5.49% interest rate.

The Skipton 100% mortgage will cost £22,080 per year. This is quite a bit more expensive than even a 95% loan-to-value (LTV) mortgage, by almost £3,000.

But this is not the only drawback. With the deposit-free mortgage first-time buyers are also more vulnerable to falling house prices.

House prices only have to drop by a small amount for the value of the house to become lower than the value of the mortgage. Compared to a 90% LTV mortgage, where prices have to drop by over 10% for this to happen.

House prices have fallen by 0.3% in April, according to Halifax‘s latest House Price Index. And commentators expect house prices to fall further this year. This makes the risk of negative equity very real in the current market.

And once the house is worth less than the mortgage, it can be difficult for homeowners to sell their home or remortgage to get a cheaper deal.

So while the 100% mortgage could help renters to get onto the property ladder, there are things to consider before taking the plunge.