It has been announced this week that two UK lenders – April Mortgages and Gable Mortgages- have now launched products for first-time buyers that do not require the borrower to pay any deposit.
While this may be welcome news to many struggling to save enough to step onto the property ladder or unable to rely on the ‘bank of Mum and Dad’, Joseph Lane, founder and director of Mortgage Lane warns of the potential financial risks of opting for one of these rarely offered deals.
He commented: “There’s no denying the appeal of a 100% mortgage for those wanting to leave the world of renting behind and who are dealing with affordability issues in the current economic climate. That being said, these kinds of products do accompany substantial financial and behavioural risks.
“First of all, there is the risk that those opting for a 100% mortgage – particularly those who’ve not needed to make lifestyle changes or sacrifices in order to save for a deposit – may lack the financial discipline needed that comes with homeownership. Saving up for a 5% – 10% deposit on a home ensures that buyers have a real stake in their purchase, and could possibly treat these newly released products as easy access to wealth or as a mere alternative to renting.
“Secondly, with 100% mortgages, buyers are starting with 0% equity in the property they are purchasing. If there is any kind of dip in the housing market and the home loses value, they may find themselves in negative equity, potentially trapping the homeowner and meaning they could take a financial loss should they need to move or relocate for any personal reasons, such as job relocation, health or family changes.
“Alongside this initial hit, those in negative equity may also find it much more difficult to remortgage or switch to a better rate or deal, as lenders will typically require a certain loan-to-value (LTV) ratio in order to refinance.
“Finally, it’s important for anyone considering taking out a 100% loan to understand and appreciate the motivation behind why lenders are beginning to offer these products again. In order to offset the heightened risk, lenders may charge higher interest rates, which could make monthly payments more expensive over the life of the loan. It’s also common for lenders to set higher arrangement fees, early repayment charges, or impose stricter credit assessments on those looking to take advantage of the products.”
Nicholas Mendes, of John Charcol, has welcomed Gable Mortgages’ new zero deposit five-year fixed deal. He views it as a crucial addition to the options available for first-time buyers, particularly those who are finding it increasingly difficult to save for a deposit while contending with record-high rents.
Mendes said: “Coming hot on the heels of April Mortgages’ launch last week, it shows lenders are starting to respond to the challenges faced by aspiring homeowners who are mortgage-ready in every way except for the deposit.
“The fundamental issue in the UK housing market remains the chronic shortage of new homes, and that is unlikely to be resolved in the near term. However, products like this do offer a genuine opportunity for those who have felt homeownership is out of reach, providing both motivation and a practical route onto the property ladder.”
Mendes also believes that Zero deposit mortgages can play an important role for renters who have strong, stable incomes and good credit histories, but have been unable to save due to the high cost of living.
He continued: “The fact that Gable’s deal is linked specifically to new-build homes also supports government efforts to encourage take-up in that sector and stimulate supply.
“One of the key strengths of this deal is the five-year fixed rate, which gives buyers certainty over their monthly repayments at a time when interest rate movements remain uncertain. That stability is hugely valuable for households trying to budget long term. Unlike the 100 per cent mortgages of the past, which were often seen as risky and too widely accessible, today’s versions are far more targeted and subject to robust affordability checks, which helps mitigate some of the risk.
“That said, there are still important considerations. Starting with no equity means buyers are more vulnerable to house price movements and may need to stay in the property for longer in order to build up enough equity to remortgage or move. If prices were to stagnate, this could have a knock-on effect on their ability to progress up the ladder. Still, it is worth noting that the UK housing market has historically been resilient, with prices holding firm or even rising during periods such as Brexit and the pandemic when many predicted the opposite.
“There may also be some limitations in terms of eligible property types or approved developers, which could reduce choice for some buyers.
With both Gable and April now entering this space, there is every chance that other lenders will follow. Increased competition could lead to better pricing, more innovation and a wider range of options for first-time buyers. The demand is clearly there, and as lenders compete more aggressively at the entry level of the market, it is likely we will see more low or no deposit offerings appear in the months ahead.
While these products will not fix the wider housing crisis, they are a crucial step in opening up access to homeownership for renters who “have been locked out for too long.”
