Everything You Need To Know About Deposit Free Mortgages

This week, Skipton Building Society announced their new Track Record Mortgage, the first deposit free mortgage option available to buyers since 2008. But what are deposit free mortgages, who do they benefit, and how will they impact the housing market?

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What Is A Deposit Free Mortgage?

When purchasing a property, the buyer will typically have to pay a deposit and make up the rest of the funds by obtaining a mortgage from a lender. However, deposit free mortgages, otherwise called 0 deposit mortgages,  eliminate the need for buyers to set down a deposit on their next property purchase, instead borrowing 100% of the funds from a lender.

Renters will be able to prove their reliability as borrowers by providing the lender with 12 or more months of consecutive rent payment receipts. Similarly, with Skipton Building Society’s mortgage, tenants will not require the assistance of a guarantor in order to obtain a mortgage, which will be a relief for those who may not have the family or connections to act as a reliable guarantor.

Who Do Deposit Free Mortgages Benefit?

A deposit free mortgage will especially benefit first-time buyers in the UK. With rising rent prices and similarly increasing house prices, many members of ‘generation rent’ have been struggling to save funds to create a substantial deposit for their first home. This has contributed to frustration among generation rent, with many arguing that their years of timely rent payments should surely prove their ability to pay back mortgage payments.

Many prospective first-time buyers have also felt at a disadvantage when compared to their peers who may be purchasing properties with the assistance of their families, with many buyers receiving help from their relatives to save up for a substantial enough mortgage. Without the need to save up for a deposit, members of the generation rent demographic will be able to more easily afford to get onto the property ladder without having to rely on funds from friends and relatives, providing them with greater financial independence.

There has also been mounting frustration among long-term renters after the Help to Buy scheme concluded in October 2022, which dashed many renters’ hopes of finally getting onto the property ladder. Under the scheme, first -time buyers would be entitled to financial assistance from the government when making their first purchase in the form of a reduced deposit of 5% as well as interest free borrowing on a percentage of your mortgage. Since the culmination of the scheme, no similar scheme has been introduced, leaving many renters feeling ‘trapped’ in the rent cycle.

What Are The Pitfalls?

Many may perceive the reintroduction of 0 deposit mortgages with scepticism, as mortgages with a higher loan to value contributed significantly to the 2008 financial crash. The mortgage option made available by Skipton Building Society also comes with an interest rate of 5.49%, which exceeds the typical 5% interest rate on five-year deals. Furthermore, there is always the risk of negative equity when it comes to utilising a deposit free mortgage, should house prices decrease over time. It is therefore important that prospective buyers do their due diligence in researching property market forecasts for the neighbourhoods they wish to purchase in to ensure that they are making a sound investment that will accrue rather than dip in value.

What’s more, generation rent will likely struggle to get onto the housing ladder irrespective of the financial options available to them, as demand for property across the country continues to far outweigh supply. As the government continues to miss their housing targets of 300,000 new units per year, many worry that the entrance of even more viable buyers into the housing market will only exacerbate issues and further drive up prices.

What Are The Benefits Of A Deposit Free Mortgage?

The number of households renting has doubled since 2001 for a number of reasons, many of which deposit free mortgages aim to mitigate. Tenants across the country have been unable to move out of the rental sector and become homeowners as a result of rising rent and house prices, making saving for a deposit increasingly difficult to afford and many properties unaffordable. The pandemic similarly dashed the hopes of many renters, with lockdown putting financial pressure on many households who had to eat into their savings in order to stay afloat. It is therefore no shock that a quarter of renters believe that COVID-19 dramatically reduced the likelihood of them buying their first home in the near future.

This is precisely why the introduction of deposit free mortgage options is so welcomed by renters and property professionals alike. Although certainly not a comprehensive cure for the woes of generation rent, the introduction of 0 deposit mortgages will broaden the options available to those who feel stuck in the cycle of renting and should, over time, allow more renters to pursue their long-term property goals of home ownership. You will also generate equity for an onward purchase should the value of your property increase, and the more mortgage payments you make means that there is less risk for homeowners of negative equity.

Can You Get A Mortgage Without A Deposit?

Getting on the housing ladder can be a difficult feat, which is why mortgage options such as the new 0 deposit mortgage are welcome additions to the market, providing renters and first-time buyers with more opportunities to purchase their first home. If you’d like to find out whether you are eligible for a deposit free mortgage, speak to a trusted financial advisor – we recommend the team at ME Financial.

For more information on how you can purchase your dream first home and to begin your property search, contact the Centrick sales team using the form below!