A NEW zero deposit mortgage has been launched that can help first-time buyers onto the property ladder with experts hailing it as a “solution for renters” but warning that “the real concern is negative equity”.
Melton Building Society has launched a 100% loan-to-value (LTV) mortgage product designed to help first-time buyers overcome the challenge of saving for a deposit.
From Monday 2nd February, the product will be available and is initially open to borrowers purchasing properties in the East Midlands.
Wider distribution, including expanded geographic availability, is being considered later in the year.
The 5-year fixed-rate product is priced at 5.99% and comes with a £199 application fee and £199 cashback on completion.
This comes as Hanley Economic Building Society launched a 100% “Rent to Own” mortgage nationwide earlier this month.
Simon Taylor, CEO of Melton Building Society, said: “It’s well documented that in recent times taking the first step into home ownership has become increasingly difficult for buyers.
“As a modern mutual building society, it’s important that we look for ways to innovate and offer solutions to overcome the barriers that exist to home ownership.
“That’s why we’ve carefully designed a product, that in partnership with Gable Sure, gives borrowers a fair opportunity to own their own home, whilst lending responsibly.”
The main risk is negative equity
Babek Ismayil, CEO at homebuying platform OneDome, cautioned against using the risks of negative equity.
He added: “The return of 100% mortgages reflects a real and growing problem in the housing market: many first-time buyers can afford monthly repayments but are completely blocked by the challenge of saving a deposit while paying high rents.
“Products like this acknowledge that reality and can provide a genuine route onto the ladder if used carefully. The main risk is negative equity, particularly if house prices fall during the fixed period, so buyers need to think long term and be confident they can stay put.
“This isn’t a shortcut to homeownership, but with sensible lending criteria, proper advice and realistic expectations, it can be a responsible solution for renters who’ve otherwise been locked out of buying altogether.”
Omer Mehmet, Managing Director at Trinity Finance, said this product can bridge the gap for many who cannot afford a mortgage.
He continued: “Zero-deposit mortgages are resurfacing because the housing system increasingly favours those with family help, not those who can afford repayments.
“For many renters, the monthly cost of owning is achievable, but the upfront hurdle is not. A 100% mortgage can help bridge that gap, provided buyers understand the exposure it brings and take a long-term, well-advised approach.”
A 100% mortgage can help bridge that gap
Dariusz Karpowicz, Director at Doncaster-based Albion Financial Advice, said first-time buyers are being held back by a lack of deposit.
He added: “Zero deposit mortgages are making a comeback, and Melton Building Society’s new 5.99% product shows lenders understand that saving for a deposit, not monthly affordability, is what stops most first-time buyers. This works brilliantly if you can handle the payments but can’t save while paying rent, though the rate is notably higher than standard mortgages right now.
“The real concern is negative equity if property values drop during your fixed term. Before you commit, think about whether you can afford the monthly payments long term, what happens if you need to move before five years, and whether you have any buffer for unexpected repairs or future rate increases.
“Professional mortgage advice becomes absolutely crucial with these products because while they solve one problem beautifully, they create new considerations that need proper understanding from the start.”
Could see a return to the world of risky lending
Richard Davidson, Mortgage Advisor at onlinemortgageadvisor.co.uk, cautioned against the use of zero deposit mortgages.
He continued: “Melton’s cautious stance on a zero deposit scheme is welcome, but there are still concerns and fears that a return to 100% mortgages could see a return to the world of risky lending that led up to the 2008 subprime crisis.
“On the other hand, what has changed since 2008 is that many tenants are stuck in a cycle where they cannot save, and therefore cannot buy, making it impossible to get on the property ladder. Any solution, if approached prudently and carefully, will be welcomed by first-time buyers, especially those in the rented sector.
Patricia Ogunfeibo, Founder at London-based tenant2owner, said the move is a “very good thing”.
She added: “The security aspect of owning one’s home cannot be underestimated either. Even with the Renters’ Rights Act, if a landlord needs to sell or move into the rental, an excellent tenant can still face a ‘no fault’ eviction.
“This 0% deposit option can therefore open a homeownership route to those not able to access other cheaper 0% deposit options, and so is a very good thing as long as buyers borrow responsibly.”
