THE return of the controversial zero deposit mortgage to Scotland’s housing market has been hailed as a shot in the arm for struggling first-time buyers.
Aldermore Bank has marked its arrival north of the Border by introducing a 100 per cent loan-to-value (LTV) deal requiring a guarantee from other family members.
The challenger bank – which has only provided mortgages for homes in England and Wales since opening in 2010 – has no branches, offering its deals through financial advisers and its website.
Its move comes just weeks after the Council of Mortgage Lenders reported a 10 per cent jump in loans to first-time buyers in the first three months of this year.
However, the number of loans available to would-be homeowners has shrunk over the past year, said Moneyfacts, while rising house prices have scuppered the hopes some first-time buyers had of saving the deposit needed.
There are also fears that banks will rein in their mortgage market activity after the Prudential Regulation Authority (PRA) this week ordered the UK’s biggest lenders to deal with capital shortfalls.
The Aldermore deal is a guarantor mortgage, where a parent (or other family member) must guarantee 25 per cent of the loan amount. The guarantee is lifted after ten years, at which point the borrower takes full responsibility of the mortgage.
Those providing the guarantee have to be aged 60 or younger at the time of the application, while the borrower must be at least 25 and taking out a loan no bigger than £250,000. The interest rate over two and three-year terms on offer is 5.48 per cent, compared with an average of 5.32 per cent on home loans needing 5 per cent deposits.
Many borrowers will struggle to meet the criteria and conditions, according to Robin Purdie, director of Mov8 Financial in Edinburgh. But he welcomed Aldermore’s arrival in Scotland as a timely boost for first-time buyers.
“There is certainly logic behind the loan and creative thinking by lenders is certainly to be welcomed when it comes to first-time buyers,” said Purdie. “For the right type of borrower this product will definitely have its place. It won’t be the answer to everyone’s prayers, but its introduction certainly won’t do the market any harm.”
For some borrowers the main advantage will be that parents can use the equity in their own home as the guarantee, according to Alison Mitchell, mortgage expert at IFA Robson Macintosh.
“Parents using other lenders have to part with money, whereas here they don’t. So it’s a boost for parents who perhaps haven’t got the hard-earned cash to give away but are happy to secure the debt against their own houses to help their children,” she said.
“It will mean that a new bunch of first-time buyers can benefit by buying their own place.”
The return of zero-deposit mortgages is controversial, given their association with the irresponsible lending practices that helped fuel the credit crunch.
“Obviously the risk of the 100 per cent loan is still there whether it’s secured on one or two properties, so you could argue the same risks apply now as they did back in 2008,” said Mitchell.
“However, with tighter controls and underwriting, hopefully the right people will opt for this deal.”
But the PRA announcement on Thursday cast a cloud over a cautiously optimistic housing market. It told Barclays, Lloyds, Royal Bank of Scotland and Nationwide Building Society to fill a collective capital shortfall estimated at £27.1 billion. Of the UK’s heavyweight mortgage lenders only Santander and HSBC escaped the PRA’s censure.
Mark Dyason, director at Edinburgh Mortgage Advice, warned that the news could hit first-time buyers particularly hard.
“The banks can’t have their capital cake and lend it. Something has to give and it may well be the higher loan-to-value borrower that loses out,” he said. “The mortgage market, driven by the first-time buyer, is much improved relative to a year ago but we may be entering a plateau period within the market as the banks focus on getting their houses in order.”