A no-deposit mortgage could help aspiring London homeowners overcome the challenge of saving a large deposit, but may result in substantially higher repayments and interest costs, research suggests.
Analysis by Benham and Reeves estimates that somebody buying the average London first-time buyer property with a 100% mortgage could pay £73,270 more interest during the first five years than a purchaser providing a 15% deposit.
The average first-time buyer home in the capital costs £471,687, meaning a conventional 15% deposit would require £70,753 in savings.
Borrowing the full purchase price would produce estimated monthly repayments of £3,331, according to the agency’s calculations. A £400,934 mortgage after providing the deposit would cost approximately £2,226 per month – £1,105 less.
HIGHER INTEREST COST
Benham and Reeves estimates that the no-deposit borrower would pay £158,104 in interest during the initial five-year period, compared with £84,834 for the buyer starting with 15% equity.
The comparison reflects both the larger amount borrowed and the different mortgage rates available at higher loan-to-value ratios.
After five years, the 100% mortgage customer would still owe approximately £429,945. The borrower who provided a deposit would have an outstanding balance of £352,193, a difference of almost £78,000.
No-deposit mortgages can nevertheless provide a route into ownership for applicants with sufficient income to support repayments but who cannot accumulate a conventional deposit.
WIDER LONDON MARKET
Similar calculations based on London’s overall average house price of £552,655 produced monthly repayments of £3,903 with a 100% mortgage.
This compared with £2,469 for a buyer providing a 15% deposit, while the estimated five-year interest difference approached £98,000.
Marc von Grundherr (main picture, inset), Director of Benham and Reeves, says: “For many aspiring buyers, saving a deposit remains the single biggest barrier to homeownership and products such as a 100% mortgage undoubtedly provide an important route onto the property ladder.
“However, buyers shouldn’t focus solely on the benefit of avoiding a deposit. They also need to understand the longer-term cost of borrowing the full value of a property.”
He added that no-deposit products could be the only realistic option for some households, but buyers able to save a deposit could reduce their repayments and interest costs while building equity more quickly.
