Homebuyers have been given the chance to purchase a property without a deposit after a lender announced it will start offering a 100 per cent mortgage.
April Mortgages is offering the deal to UK residents who earn at least £24,000 income (including as a household) and are looking to buy or remortgage a house that’s valued at more than £75,000.
Borrowers must lock in their interest rate – starting at 5.99 per cent and automatically decreasing as they pay down the mortgage – for a fixed term of 10 or 15 years.
Such products were more commonplace and were popular before the financial crash in 2008 but have become
The deal, which has been described as a “game changer”, is typical of the type of mortgage products that were available before the 2008 financial crash, but have now largely disappeared.
What it means for buyers
April’s decision to add a 100 per cent mortgage option is a boost in terms of options for those who struggle to get a sizeable deposit together, but there are of course drawbacks.
Newbuilds and flats are not available for the deal, but there are no fees for overpayments and the interest rate payable on the loan will also reduce as more of the total amount owed comes down. However, as the loan to value (LTV) rate is higher, so too is the interest rate payable when compared to “normal” deals on the market, with April Mortgages’ deal starting from 5.99 per cent.
April is not the only company offering 100 per cent mortgages: Skipton has had a ‘Track Record’ offering for two years which offers those who have rented the chance to get on the property ladder, while Accord mortgages offer a £5,000 deposit mortgage for up to 99 per cent LTV.
It’s also important for buyers to note other fees they may have to pay.
Stamp duty, legal costs, broker’s fees and other costs – including changing interest rates at the end of fixed terms – should all be considered.
Pros and cons
The biggest concern for individual buyers can be falling property prices.
If you take a 100 per cent mortgage and the property value decreases over the next few years, the owner will have negative equity – in other words, they will owe more than the house is worth.
If they need to sell, they may end up having to find more money to pay off a property that they initially put no deposit down on.
David Hollingworth, associate director at L&C Mortgages explained the big consideration for borrowers before taking on such a decision – and why April’s rules on the product might prove beneficial.
“We know that borrowers struggle to pull together the big deposits that are so often required to buy in the current market. April’s new deal will add another option to those that have strong affordability but can’t amass a deposit, whilst meeting high rents and living costs,” he 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.”
Another factor is that interest rates on mortgages can be significantly different if buyers are even able to raise a small deposit – last month’s rates showed that a five per cent deposit on a £200,000 house would be mean repayment terms were £3,500 cheaper to pay over a five-year period.
Battle between lenders
With the UK government prioritising housebuilding and getting people on the property ladder, a succession of changes have happened this year in the mortgage market.
One key issue has been the battle for remortgaging clients, with interest rates dropping this year.
Barclays recently announced their lowest rate of the year at 3.85 per cent, MPowered Mortgages have cut three-year fixed rate mortgages to 3.88 per cent and Nationwide are starting from 3.84 per cent for both new and existing customers.
Nationwide has also become the latest company to reduce their stress test rates, meaning lenders could borrow up to £28,000 more than previously. Santander did likewise last month, while Skipton recently brought out a mortgage product with no repayments for the first three months.
