No-deposit mortgages could cost first-time buyers
No-deposit mortgage could cost London first-time buyers £73,000 more in interest over first five years
The latest research by London lettings and estate agent, Benham and Reeves, has revealed that whilst the emergence of no-deposit mortgages provides a welcome route onto the property ladder for buyers struggling to save, the cost of doing so is considerable, with the average London first-time buyer set to pay more than £73,000 extra in interest during the first five years of homeownership alone.
Benham and Reeves analysed the cost of purchasing both the average first-time buyer home and the average home across the wider London market using a 100% mortgage product, comparing it to the cost of buying the same property with a traditional 15% deposit mortgage based on current average market rates.
First-time buyers hit hardest
The research shows that the average first-time buyer property in London currently costs £471,687.
A buyer using a no-deposit mortgage would therefore need to borrow the full purchase price, resulting in estimated monthly repayments of £3,331.
In comparison, a buyer purchasing with a traditional 15% deposit of £70,753 would require a mortgage of £400,934, reducing monthly repayments to £2,226 per month – a saving of £1,105 every month.
During the first five years of the mortgage, a buyer using a no-deposit product would pay an estimated £158,104 in interest alone. A buyer purchasing with a 15% deposit would pay £84,834, meaning the no-deposit route costs £73,270 more in interest during the initial five-year fixed period.
Despite paying considerably more each month, buyers taking the no-deposit route also build equity at a slower pace. After five years they would still owe £429,945, compared to £352,193 for someone purchasing with a traditional deposit – a difference of almost £78,000.
The wider market tells a similar story
The financial premium associated with borrowing the full value of a property isn’t limited to first-time buyers.
Based on the average London house price of £552,655, a buyer using a no-deposit mortgage would face estimated monthly repayments of £3,903, compared to £2,469 for someone purchasing with a conventional 15% deposit.
Over the first five years alone, the buyer using a 100% mortgage would pay an estimated £185,244 in interest, compared to £87,285 for a buyer purchasing with a 15% deposit – a difference of almost £98,000.
They would also owe £503,747 on their mortgage after five years, compared to £408,891 for the buyer who entered the market with a deposit, highlighting the slower pace at which equity is built when borrowing the full purchase price.
Marc von Grundherr, Director of Benham and Reeves, commented:
“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, because the difference in monthly repayments and the amount of interest paid over the first few years is substantial.
That certainly doesn’t mean these products are a bad idea. For many buyers they’ll provide the only realistic opportunity to purchase a home and building some equity on your own home is certainly better than nothing.
That said, where circumstances allow, taking a little longer to build a deposit can still make a significant financial difference over the life of the mortgage, reducing monthly repayments, lowering interest costs and helping buyers build equity at a much faster rate.”
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