How does a zero-deposit mortgage work and is it a good idea?

Skipton Building Society reintroducing deposit free mortgages for first time buyers

By Narbeh Minassian, ITV News Content producer

The lenders behind a new mortgage hope to turn renters into homeowners by offering deals without deposits.

Skipton Building Society has announced a zero-deposit mortgage, specifically targeted at renters looking to buy their first home.

The group’s chief executive of home financing, Charlotte Harrison, said the mortgage “has been carefully created with the challenges generation rent is facing in mind, together with the potential risks and challenges they may encounter in the future too.”

But what does this mean for tenants trying to get onto the property ladder and does the deal stand up to scrutiny?

What exactly is this scheme offering?

Renters who lack savings or financial support from their family can potentially make the jump on to the housing ladder with this new zero-deposit mortgage.

Skipton’s new “track record” mortgage could give a helping hand to people with a strong history of paying their rent but who have been only able to save a little or nothing for a deposit for their first home.

How would that work?

The deal is available for first-time buyers across Britain.

Tenants aged 21 and over may be able to take out mortgages at between 95% to 100% of the value of the property they want to buy.

In return, they will need to demonstrate a strong track record of paying their rent, with evidence of a minimum of 12 months of rental history.

This evidence could be provided through bank statements or a letter from a suitably registered letting agent, for example.

So, is any renter eligible?

The short answer is – not quite. There are several terms and conditions to note.

People may be eligible if:

• they have paid in full at least 12 months rent in a row within the past 18 months;

• are looking to borrow no more than £600,000;

• pass affordability and credit checks;

• are not trying to purchase a new-build flat.

The Society’s definition of a new-build home is one that is being sold for occupation for the first time, which has been newly built or converted within the past three calendar years.

It also said the track record mortgage cannot be used with any other borrowing scheme.

With strict checks in place, Skipton Chief executive Stuart Haire says the scheme will only be available for those who can afford it

Skipton also said it will be ensuring, when looking at affordability, that buyers will not be paying more on a monthly basis than their current rent.

For example, a tenant paying an average of £800 per month over the past six months will have a maximum monthly mortgage payment of £800.

The fee-free mortgage is a five-year-fixed-rate product with a rate of 5.49% and the maximum mortgage term is 35 years.

This is higher than the average rate, which comparison site Uswitch calculated as 4.69% for five-year fixed-rate mortgages.

Rob Dix, host of the Property Podcast, believes 5.49% "doesn’t seem too unattractive."

"Buyers will probably make the calculation that even if they’re locking in a relatively high interest rate for five years, that’s better than being stuck in the rental market," he told ITV News.

The hidden danger is that, in five years, they’ll have very few other options unless the value of their property has increased - so they’ll be stuck paying whatever rate Skipton is charging at the time."

Are there any concerns?

While the new deal has been welcomed by some experts, concerns remain the root cause of problem for renters isn’t being addressed – a shortage in housing.

Generation Rent, which campaigns for private renters, believes only a “small number” of people would stand to benefit – arguing those who pass affordability checks would be able to save for a deposit anyway.

Dan Wilson Craw, Generation Rent’s acting director, told ITV News: “If this did take off, we would be concerned that without measures to increase the availability of homes, we would have more borrowers competing for the same number of homes, and that would just push up prices.

“Then further down the line the government and lenders would try to come up with another scheme to help first time buyers get a mortgage to pay the inflated prices. Where would it end?

“To properly improve the affordability of housing we need to make more homes available – and that means building more in the places people want to live.

“More houses mean lower rents, and tenants able to save more in the first place.”

Consumer finance expert at MoneyMagpie.com Jasmine Birtles says the scheme could leave buyers vulnerable to falling house prices

Rachel Springall, a finance expert at financial information website Moneyfacts, also pointed to a need for more housing supply – while adding the deal could help some “get off the rental treadmill.”

“It is great to see more support for first-time buyers who are struggling to afford a deposit for a mortgage,” she said.

“But even if we were to see more innovative deals surface, affordable housing is very much in short supply, and there need to be significant changes to the market to turn this around.”

Mr Dix added that, while he doesn't have an issue with the product, the demand for a scheme like the track record mortgage is a "sign of how dysfunctional the housing market is."

"Mortgage products with minimal deposits and 35-year terms are engineered to allow banks to keep lending despite higher interest rates, and their existence contributes to keeping prices high," he said.

"Much of the urgency to buy a home at the moment comes from the lack of security, rocketing rents and lack of options in the rented sector.

"The government has plans to partially address this, but renting shouldn’t be such a poor alternative that people will do anything to buy."

Could it help?

While these concerns could mean the deal may not be suitable for everyone – as Andrew Montlake, managing director of mortgage broker Coreco, said – he believes the time “seems right.”

“There are many potential buyers who have proved they can afford to pay rent at the current high levels, but just do not have the means to meet ever-increasing deposit levels and feel constantly at the mercy of rising rents,” he said.

“Whilst I have had some concerns in the past, the time now seems right for a new type of 100% mortgage, one that is underwritten prudently and where affordability is carefully taken into account.”

“It will help some of the new generation of home buyers get off the rental treadmill and enjoy the security of owning their own home,” he added.

Independent mortgage adviser Deasha Waddup also welcomed the move, telling ITV News she is "excited to have more options" for first-time buyers.

"This is a great idea to help those that have been struggling for a while to save enough money or do not have money from a guarantor," she said.

How does rent typically compare with mortgage repayments?

Property website Rightmove recently calculated those in the 15% deposit bracket would pay an average of about £1,056 per month, compared with £865 last year, due to mortgage rates and house prices rising.

The average asking rent for a first-time buyer type property is £1,120 per month, having increased 11% compared with last year, the website added.

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