Saving for a deposit to buy a home can be difficult during times of high property prices. This is particularly the case when the average price of a property rises above four times the average salary. This can make the task of saving for a deposit take several years, especially if property prices are continuing to rise.
To help people negate this problem, a growing number of lenders have previously issued no deposit mortgage products. On the surface they can seem like the answer to all your prayers, particularly if you are struggling to get on the first rung of the property ladder.
While they can be a great tool to utilise when buying your first home, there are costs involved that must be considered. When the mortgage is first approved, lenders may insist on the customer paying for mortgage indemnity insurance or a higher lending charge. These costs usually apply to mortgages that have a loan-to-value ratio of 75% or more. The actual cost of this fee can go into the thousands of pounds initially, and if added to the loan balance, can cost many more thousands of pounds in extra interest payments over the life of the loan.
No deposit mortgages are also subject to higher interest rates than mortgages that require the borrower to pay for a deposit. A higher interest rate will lead to higher monthly payments and therefore make the loan more expensive to maintain during its term. Because no deposit mortgages are usually taken out by first time buyers who have little savings and relatively low incomes these extra costs are burdened on the people who can least afford them. Careful consideration should therefore be given before applying for this type of mortgage product.
Despite the extra costs, no deposit mortgages are a useful tool for securing a first property. After several years of making repayments borrowers may be able to remortgage to a product with more competitive rates and fees. This is particularly the case where the home owner has been able to pay off some of their mortgage balance. After reducing the loan to value ratio on their mortgage the home owner will be able to apply for a wider variety of products when remortgaging as there will be less risk involved to the lender.
Although they can be beneficial to people struggling to get onto the property ladder there are restrictions on no deposit mortgages. To begin with they are usually only made available to people in full-time, permanent employment that have steady and provable incomes. This can exclude many UK workers from applying for this type of mortgage product.
Additionally, in the wake of the global credit crunch, many lenders have been pulling their no deposit home loan products from the market. This is because they are a risky product for lenders to offer as there is no margin for error if the property needs to be repossessed and sold to pay off the mortgage balance if the borrower defaults. No deposit mortgages are therefore not as prevalent in the UK market as they once were.
