Saving for a deposit is one of the biggest barriers to home ownership for renters, even for those who can comfortably afford monthly payments.
To combat this, a small building society has launched a mortgage that removes the deposit altogether, offering loans of up to 100 per cent of a property’s value.
The product is aimed at renters who can prove they have kept up with their monthly repayments but have struggled to save while doing so.
Supporters say it could help a locked-out generation finally buy a home, but critics say there are a number of catches attached to the deal.
Here, we spoke to experts about how the mortgage works, who it could help and what borrowers need to watch out for.
How does the 100 per cent mortgage work?
The mortgage has been launched by the Hanley Economic Building Society, based in Stoke-on-Trent, and is being marketed as a route onto the property ladder for long-term renters without a deposit.
It is less suitable for those with uncertain incomes or who expect to move again within a few years.
Rather than relying on savings, the lender assesses whether applicants have a proven track record of paying rent at a level similar to the proposed mortgage repayments.
Borrowers can take out a loan covering the full purchase price of a property, meaning no upfront deposit is required.
While 100 per cent mortgages existed before the financial crisis, they largely disappeared after 2008 as lenders tightened standards.
What’s the catch?
The mortgage is offered on a five-year fixed rate of 5.79 per cent, which sits well above the wider market, where the average five-year mortgage rate is around 4.9 per cent, according to Moneyfactscompare.
Other lenders now offer near-zero or high loan-to-value deals at lower headline rates.
This includes Skipton Building Society’s 95 per cent LTV – which means a deposit of 5 per cent is required – a five-year fix at about 4.35 per cent and Nationwide’s at around 4.53 per cent.
Nationwide and Virgin Money also offer 90 per cent five-year fixes at roughly 4.16 to 4.19 per cent.
Home buyers will only be able to borrow up to £350,000 and you will need to earn at least £25,000 per year.
To qualify, applicants must also show at least 12 months of rental payment history, with evidence that payments have been made on time.
The monthly rent must be broadly equivalent to the expected mortgage repayment, whilst the product is only available on houses rather than flats.
As part of the affordability criteria, Hanley has capped the maximum monthly mortgage payment a borrower can have at 133 per cent of the amount they are currently paying in rent.
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Another risk is falling foul of negative equity, where the balance on your property is worth less than the balance left to pay on your mortgage.
As borrowers start with no equity, they are more exposed if house prices fall, limiting their ability to remortgage or sell.
Exit options are also more limited, as switching to a cheaper deal may not be possible until equity has built up.
What the experts say
Experts say the Hanley rent-to-own mortgage highlights a growing effort by lenders to tackle the challenges facing first-time buyers, particularly those struggling to save for a deposit.
David Hollingworth of L&C Mortgages said: “Lenders have been increasingly looking to address the issues that many first-time buyers face.
“That’s seen some focus on increasing the amounts that they may be able to lend, but also an increased number of deals for those with little or no deposit.
“Many looking to get on the ladder can be frustrated by trying to save for a deposit whilst also paying a high rent, which makes it all the harder to get in a position to buy.”
He pointed to the potential speed this approach offers, which he described as a “real bonus”, as it could help to accelerate potential buyers’ chances of owning their own home.
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However, he cautioned: “Borrowing at 100 per cent does mean that interest rates will be higher than they could access with a bigger deposit.
“Those that can stretch to a 5 per cent deposit could potentially open up options with lower rates.
“Leek Building Society offers a five-year fix as low as 4.56 per cent up to 95 per cent LTV, for example, although it does carry a fee of £995. The Hanley deal has no arrangement fee.”
Nick Mendes of brokers John Charcol said that although “the attraction is obvious,” there are things to watch out for.
“A 100 per cent mortgage leaves no equity buffer. If prices soften, borrowers can fall into negative equity quickly, which can restrict options if they need to move or refinance.
“The pricing is also typically higher than mainstream high LTV products, reflecting the additional risk of lending at 100 per cent LTV.
“Even where there are no application or arrangement fees, borrowers should still factor in valuation and legal costs, plus the ongoing cost of running a home.”
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