It’s been announced this week that two UK lenders – April Mortgages and Gable Mortgages– have now launched products for first time buyers that don’t 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 award-winning brokerage Mortgage Lane warns of the potential financial risks of opting for one of these rarely offered deals:
“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.”
