Lenders waking up to the challenges of first-time buyers

You know how it’s always said about buses, you wait ages for one and then two come along at once… Well, that seems to be the case, too, with 100% LTV, no deposit mortgages.  No sooner has the dust settled from April Mortgages’ big announcement of its own deposit-free offering, then another product hits the market. Just days later, Gable Mortgages has unveiled its answer to first-time buyers’ affordability challenges - a zero deposit, five-year fixed deal.

Are lenders waking up fully to the difficulties which beset those struggling to get on to the property ladder? Nicholas Mendes (pictured left), head of marketing at London broker John Charcol, believes so, and regards Gable Mortgages’ product as a crucial addition to the options available for first-time buyers, particularly those who are finding it increasingly difficult to save for a deposit while contending with record-high rents. “Coming hot on the heels of April Mortgages’ launch last week, it shows lenders are starting to respond to the challenges faced by aspiring homeowners who are mortgage-ready in every way except for the deposit,” Mendes commented.

The fact that Gable’s deal is linked specifically to new-build homes also supports government efforts to encourage take-up in that sector and stimulate supply, he suggests. “The fundamental issue in the UK housing market remains the chronic shortage of new homes, and that is unlikely to be resolved in the near term,” said Mendes. “However, products like this do offer a genuine opportunity for those who have felt homeownership is out of reach, providing both motivation and a practical route onto the property ladder. Zero deposit mortgages can play an important role for renters who have strong, stable incomes and good credit histories, but have been unable to save due to the high cost-of-living.

“One of the key strengths of this deal is the five-year fixed rate, which gives buyers certainty over their monthly repayments at a time when interest rate movements remain uncertain. That stability is hugely valuable for households trying to budget long term. Unlike the 100% mortgages of the past, which were often seen as risky and too widely accessible, today’s versions are far more targeted and subject to robust affordability checks, which helps mitigate some of the risk.”

Mendes emphasises that there are still important considerations for borrowers to bear in mind. “Starting with no equity means buyers are more vulnerable to house price movements and may need to stay in the property for longer in order to build up enough equity to remortgage or move,” he said. “If prices were to stagnate, this could have a knock-on effect on their ability to progress up the ladder. Still, it is worth noting that the UK housing market has historically been resilient, with prices holding firm or even rising during periods such as Brexit and the pandemic, when many predicted the opposite.”

There may also be some limitations in terms of eligible property types or approved developers, which could reduce choice for some buyers, Mendes observes. But he believes that the market could develop further. “With both Gable and April now entering this space, there is every chance that other lenders will follow,” he said. “Increased competition could lead to better pricing, more innovation and a wider range of options for first-time buyers. The demand is clearly there, and as lenders compete more aggressively at the entry level of the market, it is likely we will see more low or no deposit offerings appear in the months ahead. While these products will not fix the wider housing crisis, they are a crucial step in opening up access to homeownership for renters who have been locked out for too long.”

While 100% mortgages may be welcomed by many struggling to save enough to step on to the property ladder or unable to rely on the Bank of Mum and Dad, Joseph Lane (pictured second from left), founder and director of award-winning brokerage Mortgage Lane, warns of the potential financial risks of opting for one of these deals. “There’s no denying the appeal of a 100% mortgage for those wanting to leave the world of renting behind and who are dealing with affordability issues in the current economic climate,” Lane reasoned. “That being said, these kinds of products do accompany substantial financial and behavioural risks. First of all, there is the risk that those opting for a 100% mortgage - particularly those who’ve not needed to make lifestyle changes or sacrifices in order to save for a deposit, may lack the financial discipline needed that comes with homeownership.”

Saving up for a deposit of 5% to 10% on a home ensures that buyers have a real stake in their purchase, Lane suggests – they could possibly treat these newly released products as easy access to wealth or as a mere alternative to renting. “With 100% mortgages, buyers are starting with 0% equity in the property they are purchasing,” he said. “If there is any kind of dip in the housing market and the home loses value, they may find themselves in negative equity, potentially trapping the homeowner and meaning they could take a financial loss should they need to move or relocate for any personal reasons, such as job relocation, health or family changes. Alongside this initial hit, those in negative equity may also find it much more difficult to remortgage or switch to a better rate or deal, as lenders will typically require a certain loan-to-value (LTV) ratio in order to refinance.”

Lane emphasises that it is important for anyone considering taking out a 100% loan to understand and appreciate the motivation for lenders to offer these products again. “In order to offset the heightened risk, lenders may charge higher interest rates, which could make monthly payments more expensive over the life of the loan,” he said. “It’s also common for lenders to set higher arrangement fees, early repayment charges, or impose stricter credit assessments on those looking to take advantage of the products.” 

Read more: Brokers on current mortgage market trends

Can negative equity be avoided?

Jamie Lester (pictured second from right), founder and head of Haus Properties, suggests though that the property market has increased in price over the past 10 years, avoiding the likelihood of negative equity for borrowers choosing this option, though he believes the market will need re-educating because these products haven’t been prevalent for a long time. “100% mortgages are back, and headlining,” Lester declared. “For anyone wanting to own a home, this is the most amazing opportunity for them, rather than being stuck in generation rent. I know this first hand as I bought with a 102% mortgage in 2000. Secondly, this product is all about affordability and not LTV. Making sure the buyers have control over their finances, together with a strong asset, will help mitigate any issues.”

Broker Michelle Lawson (pictured right), director of Lawson Financial, acknowledges the struggles of first-time buyers, which can vary with their geographic region, but considers that raising the multipliers will help. “There are multiple products available and 100% has been available in different guises before April and Gable’s launch, including the ability for 100% on shared ownership,” Lawson said. “The importance for the borrower is to speak to an experienced mortgage adviser as everything is becoming more complicated now than ever, although the intention is for clarity and simplicity.”

Difficulties with credit are compounding the problem for first-time buyers, in Lawson’s view. “Affordability and deposits are generally the key but we are also seeing credit issues and the misuse of credit,” she explained. “There are people ignoring parking fines and not updating their addresses for mail or bills, as most things are now online, and they are then receiving defaults for non-payment which inhibits their mortgage options.”

Thomas Boughton (pictured inset, above), founder of Artillium Finance Partners, is concerned that first-time buyers will find themselves facing fresh challenges. “100% LTV on new builds will be an absolute disaster,” Boughton commented. “New build premiums make it certain that as soon as people complete, they’re straight into negative equity. Lenders will love it as they’ll have a book of mortgage prisoners, but not so great for those looking to move after a couple of years.”