Take it to the max
Innovative mortgages that do not require a deposit can help you get onto the property ladder sooner rather than later. Barney McCarthy finds out more
As a first-time buyer in a market characterised by soaring house prices and rising interest rates, you may feel like a passenger rooted to the platform as a runaway train rattles past. But don’t feel like you’ll never start your journey, as there are plenty of ways you can jump aboard.
The high price of potential properties is likely to be the fi rst obstacle in your way. If you are struggling to raise a deposit, then it may be worth looking at borrowing a larger proportion of the property’s value. Research from independent brokerage Mortgage Advice Bureau (MAB) revealed a 50 per cent increase in the number of first-time buyers taking out mortgages without a deposit (also known as 100 per cent mortgages) in 2006 compared with 2005.
Buyer beware
MAB does urge borrowers to be aware of the repercussions of such mortgages though, as they often charge a higher interest rate and many carry Higher Lending Charges.
Brian Murphy, lending manager at MAB, says: “Many people in the market still view deposit-free mortgages as the final resort for mortgage borrowing. However, the increasing numbers of buyers opting for these products over the past year shows that these mortgages are now a very good solution for first-time buyers who stand little hope of entering the
housing market without them. They offer these buyers an opportunity to move away from increasing monthly rental payments, without forcing them to put money down as a deposit.”
Pros and cons
The obvious benefit of a mortgage without a deposit is that it allows you to get on the ladder straight away. With house prices rising at the rate they are, Nationwide says that you would need to save £50 a day just to keep pace with house price rises. The money you save by not having to pay a deposit could also free up funds for other moving essentials such as furniture and appliances. But don’t think that you won’t have to part with any cash. If your desired property costs over £125,000 then you will be liable for Stamp Duty.
The majority of 100 per cent mortgages will also be charged at higher interest rates and you may not be able to move house if the property decreases in value as you will owe the lender more than the property is worth. While it can provide a viable option now, a deposit-free mortgage may not be the best deal for you in the long term.
Abbey is one of the lenders that offers a 100 per cent mortgage and acknowledged in recent research the difficulties that first-time buyers face trying to accrue a deposit. It said that of the potential first-time buyers saving for a deposit, 11.2m of them have admitted dipping into their saving accounts.
Difficult save
Worse still, it found that one in 10 raid their savings once a month and 888,000 use some of the money destined for their deposit every week. In light of this, it may be worth taking out a savings account that doesn’t allow you to withdraw from it for a locked-in period if you don’t trust your own discipline.
Ricky Okey, managing director of Abbey for Intermediaries, says: “As surprising as the research is, it does go a long way to explaining why so many people are finding it hard to get onto the property ladder, and why of the first time
buyers we spoke to, we found that there is a strong demand for 100 per cent mortgages as many have not been able to save a deposit large enough.”
Research from Alliance & Leicester suggests the 100 per cent plus mortgage market will grow by around 10 per cent over the next two years and suggests that over three-quarters of mortgage brokers have already advised on this type of product.
Take your time
Though 100 per cent mortgages are a helpful option for first-time buyers and can completely remove the need for a deposit, don’t think this gives you carte blanche to be financially irresponsible. You will still need discipline to make your mortgage repayments and these will often be charged at a higher rate than if you had opted for a more conventional mortgage. See 100 per cent deals as a possible choice, but not necessarily the most cost-effective way on board the property express.
Definitions
100% Mortgages
As well as the host of lenders offering deposit-free 100% mortgages, a handful of lenders also offer loans up to 125% of the property’s value. These products aren’t always purely a mortgage though, and often contain a secured loan element.
Northern Rock’s Together mortgage is perhaps the most long-standing example of this, offering 95% of the property value as a mortgage and a further 30% as an unsecured loan. BM Solutions – a lender whose products you can only access via a broker – also offers a similar proposition called Mortgage Plus. Don’t assume that these products completely remove the need for a deposit though as part of the unsecured loan sometimes has to serve as a 5% deposit. They are usually only available to borrowers with an impeccable credit rating too, and note that the total loan size is limited.
Higher lending charges
Higher Lending Charges (HLCs) are fee imposed when you borrow over a certain percentage of the property value, usually 90%. If you are borrowing this kind of proportion, it inevitably means you have a small deposit, so mortgage lenders charge HLCs to cover the risk involved. They may be charged upfront, or built into the overall loan size. Not all lenders charge HLCs, so it is worth shopping around if you require a high loan-to-value mortgage and don’t have a
substantial deposit.
Save yourself!
Higher Lending Charges (HLCs) are fees imposed when you borrow over a certain percentage of the property value, usually 90%. If you are borrowing this kind of proportion, it inevitably means you have a small deposit, so mortgage lenders charge HLCs to cover the risk involved. They may be charged upfront, or built into the overall loan size. Not all lenders charge HLCs, so it is worth shopping around if you require a high loan-to-value mortgage and don’t have a
substantial deposit.
Tags: first mortgages, First time buyers, higher lending charges, house prices, interest rates, Mortgage, Mortgage news, mortgages
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