Barclays has shaken up the mortgage market by bringing back the no-deposit mortgage - the first of its kind since the financial crash.
The lender is changing the terms of its Family Springboard Mortgage so that buyers no longer need to put down a deposit when they buy a home. Previously, they needed at least a 5% deposit.
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The catch
However, the mortgage isn’t completely deposit-free. The Family Springboard mortgage requires someone else, a family member or guardian, to put 10% of the value of the property in a linked savings account. The money is held for three years earning interest before it is returned to the family member.
“This is not true 100% lending and not the same as that which became symptomatic of loosening lending standards in 2007,” says David Hollingworth, a mortgage broker at London & Country Mortgages.
First time buyers are increasingly relying on parents to help with their deposit, according to Hollingworth. This new loan lets them take out a mortgage in their own name without Mum and Dad having to fork out a lump sum - a plus for both parties.
Parents have become so integral to many first time buyers finances that the Bank of Mum and Dad is now the 10th biggest mortgage lender, according to figures from Legal & General. Parents will provide deposits for 300,000 mortgages in 2016, lending over £5 billion.
A return to risky lending?
While Barclays isn’t a true 100% mortgage, the risk is it could open the gate for other lenders to return to the deposit-free mortgages of the past.
Bringing 100% mortgages back to the market in order to capture market share is like ‘fighting fire with gasoline’, says property market expert Henry Pryor.
Deposit-free mortgages used to be common but they were pulled from the market following the collapse of Northern Rock back in September 2007. These mortgages are reliant on house prices rising- if they fall borrowers are immediately in negative equity, owing more to a lender than their house is worth.
Jody Baker, head of money at Comparethemarket.com, says that this mortgage provides a viable option but advises buyers to proceed with caution:
“We would expect these products to remain few and far between at the fringes of the mortgages lending universe by necessity – after all, it was riskier lending which caused the financial crisis in the first place.”
Barclays Springboard Mortgage at a glance
- Three-year, fixed-rate deal available for 2.99%
- Buyers no longer need to provide a 5% deposit
- Helper must put 10% of the value of the property in a linked savings account paying 2%
- The maximum income multiple (how much you can borrow above your salary) raised to 5.5
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