Zero-Deposit Mortgages For First-time Homebuyers: Yay or Nay?

Zero-deposit mortgages are making a comeback; promised to help renters get on the property ladder.

First-time homebuyers in 2023 will need to earn an additional £7,500 to afford the same house they could buy in 2020, according to Zoopla.

But guess what? The Office for National Statistics reports that wages have only increased by £4,800 since 2020.

It is becoming increasingly difficult for renters in the UK to achieve their dream of homeownership. This is exactly what the Skipton Building Society says it wants to ease by introducing deposit-free mortgages back into the housing market.

This article dives deeper into 100% mortgages a.k.a zero-deposit mortgages. Read ahead to find out if this could be your best option to stop renting and finally own a home.

Eligibility requirements for a zero-deposit mortgage in the UK

Skipton Building Society launched zero-deposit mortgages exclusive to renters above 21 years of age. Here are the eligibility requirements:

✅ Buyers must pass a credit and affordability check
✅ Buyers must provide evidence of at least 12 months of on-time rent payment.

In a deal like this, the monthly mortgage payment must be less than the average rent over the past 6 months. This makes buying a house cheaper than renting because you would be building equity in your home instead of paying rent to a landlord.

But there are warnings about zero-deposit mortgages, as it poses a risk of negative equity for the borrower.

What you need to know about deposit-free mortgages and negative equity

With a zero-deposit mortgage, the loan-to-value (LTV) ratio is 100%, meaning the loan amount equals the full value of the property. It’s important to note that a higher LTV increases the risk of negative equity.
This means that even a slight decrease in house prices can result in the borrower owing more on the mortgage than the actual value of the home itself. However, negative equity in itself is not necessarily a negative situation unless you decide to sell or refinance the property.

Therefore, its impact largely depends on the purpose behind your home purchase. If you intend to acquire your first home through a zero-deposit mortgage, you should make sure you don’t regret buying it. 

How to make the best of a 100% mortgage with Adjoin Homes

If you lack a significant amount of money for a mortgage deposit, opting for a zero-deposit mortgage could be the most suitable option for you to become a homeowner at this time. Especially when renting is more expensive than a monthly mortgage.

Here’s the best part. Combining Adjoin’s rent now buy later scheme with a zero deposit mortgage can potentially create a win-win situation if you ultimately decide to purchase the property.

Here’s why:

1) You try the property before you buy it so you feel more secure about its suitability. This helps you make a concrete choice so that even in case of negative equity, it won’t affect you as you will be home and happily satisfied.

2) If you opt for our Share In The Upside offering, then you would get a discount on the purchase price. This discount will act as a cushion that protects you from negative equity even if you get a zero-deposit mortgage. 

3) For example, say the market value at the time of purchase is £600,000. But with the Adjoin discount, you buy the house for £580,000 using a zero-deposit mortgage. In this case, the value has to drop by more than £20,000 for you to go into negative equity. Without the Adjoin discount, even a £1 decrease in the home value would result in negative equity.

Now that is what we call a sweet deal here at Adjoin Homes. Talk to us if you’re interested.

PS: There is no restriction whatsoever in the financing you can choose if you decide to buy at the end of your Adjoin tenancy.  Low LTV or high LTV mortgages all can work, depending on your circumstances.