Return of 100% mortgage gathers pace as lenders target first-time buyers

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The return of the 100 per cent mortgage is gathering pace in the UK as lenders loosen their criteria in a bid to boost homebuying.

April Mortgages and Gable Mortgages launched no-deposit deals this month with mortgage brokers predicting more will hit the market soon in a move reminiscent of the pre-financial crisis property market.

“The demand is clearly there, and as lenders compete more aggressively, it is likely we will see more low or no deposit offerings appear in the months ahead,” said Nicholas Mendes of brokerage John Charcol.

Specialist lender April launched a no-deposit mortgage available to people with a salary of £24,000 or more at a 10- or 15-year fixed rate. A few days later, Gable Mortgages introduced a similar deal on a five-year fixed rate targeting first-time buyers and those looking for newly built homes.

Other lenders that offer zero-deposit loans include Skipton Building Society, Halifax and Barclays, although the deals of the last two come with conditions.

These deals, which were mainstream in the run-up to the 2008 financial crisis, have largely disappeared as lenders have become more conservative in the face of more stringent regulation and increased scrutiny.

“We’re starting to see the re-emergence of 100 per cent mortgages but there will be a lot more affordability checks in place, which is a very good thing,” said Simon Gammon, managing partner of Knight Frank Finance.

Such deals come with higher borrowing costs. Gable and April are offering rates of 5.95 per cent and 5.99 per cent on their no-deposit mortgages, respectively. By contrast, the average rate on a five-year mortgage is 5.09 per cent according to Moneyfacts.

The new loans could “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”, said Mendes.

Demand for lower deposit requirements has risen in recent years as aspiring homebuyers with few or no savings struggle to get on the property ladder. The average deposit to buy a property in the UK is more than £60,000 and more than £100,000 in London, according to Halifax.

Mortgage experts who remember the 2008 financial crash point out the risks linked to such loans, which might deter large lenders such as Lloyds and NatWest from making these offers.

One concern is the risk of negative equity for buyers in the event of a fall in house prices as the value of their home dips below what they owe.

“The big mistake that was made [before the financial crisis] was that people just assumed house prices would keep going up and it wouldn’t be a problem to borrow 100 per cent,” said Gammon.

The new loans might work in specific circumstances, he added, such as for people who think they can improve the value of their home, or for those aiming to pay down some of their debt in the near future.

“I would not recommend it to someone who was just going to assume that house prices were going to go up over time,” he added.