ising house prices, soaring rents, the cost of living crisis and the impending end of the Government’s Help to Buy scheme are making it harder than ever for London buyers to save for a deposit, the cost of which peaked at an average of over £151,700 last year, according to the Financial Times.
There is potentially some light at the end of the tunnel: neo-lender Proportunity has announced a zero deposit mortgage product, intended to help those who can’t raise the five per cent deposit on which many mortgage providers insist as a minimum.
The company plans to offer the zero-deposit scheme as part of its existing offering, which helps customers access the finance they need to get on the property ladder via a mortgage booster loan.
This loan is paid back on an interest-only basis and the capital amount doesn’t have to be repaid until the buyer finally sells their property, hopefully for a profit.
So far, the company has financed more than £100m of homes and helped over 260 people into the property market.
Sarah Tucker, founder of The Mortgage Mum, says the main advantage of the scheme is obvious: helping thousands of first-time buyers get on to the property ladder before they otherwise would have.
But, like anything that sounds too good to be true, there are caveats.
The scheme’s success relies on the value of a property increasing over time.
Proportunity has created a complex piece of technology, called the Proportunity Home Index (PHI), which identifies undervalued and overvalued homes so buyers can make smart decisions and accurately assess a property’s potential.
More than 150 data points are analysed, including property size, crime rates, transport links and energy performance sources.
“A challenge for people will be trusting this Home Index because, if it makes a wrong assessment of a property that acts as an anomaly in the index, it could result in negative equity for the buyer,” warns Gerard Boon, managing partner of Boon Brokers.
PHI accuracy is all the more important when there is zero deposit involved and finances are so finely balanced.
There is also the issue of how mortgage providers, never ones to relish risk, will react to a Proportunity-funded application with zero deposit.
“I expect lenders to be sceptical at first until they see positive results of the scheme on a mass scale,” says Boon.
“The scheme may prompt alarming flashbacks of the 100 per cent loan-to-value mortgage products that were offered before the 2007-8 financial crisis, which ended in disaster and negative equity on an enormous scale.”
While it has been touted as an alternative to the Help To Buy Equity Loan and aims to capture the estimated £4.4billion gap left behind when this ends in October, there are some differences to be aware of.
Proportunity’s scheme requires no deposit, there are fewer limitations on the type of property you buy and the maximum value is up to £1 million.
If Proportunity’s combination of innovative financing and technology prove successful, there are potential rewards for those willing to take a risk.