London first-time buyers using a no-deposit mortgage could pay more than £73,000 in additional interest during their first five years of ownership according to analysis from Benham and Reeves.
The estate and lettings agency compared the estimated cost of a 100% loan-to-value mortgage with borrowing at 85% LTV, using current average mortgage rates for the two product tiers.
Based on an average London first-time buyer property price of £471,687, a borrower taking a 100% mortgage would face estimated monthly repayments of £3,331.
A buyer providing a 15% deposit of £70,753 would borrow £400,934 and pay an estimated £2,226 per month, reducing their repayments by £1,105.
INTEREST AND EQUITY GAP
Benham and Reeves calculated that the no-deposit borrower would pay £158,104 in interest during the initial five-year period, compared with £84,834 for the borrower purchasing at 85% LTV.
This represents an additional £73,270 in interest, although the comparison reflects both the larger loan and the higher mortgage rate generally associated with 100% LTV borrowing.
The no-deposit customer would owe approximately £429,945 after five years, while the buyer starting with a 15% equity stake would have an outstanding balance of £352,193.
The figures highlight the importance of comparing the immediate benefit of buying without a deposit against higher monthly commitments, slower capital repayment and the borrower’s exposure to negative equity if house prices fall.
ACCESS VERSUS LONG-TERM COST
The analysis produced a larger gap across the wider London market. On an average property price of £552,655, estimated repayments were £3,903 at 100% LTV and £2,469 with a 15% deposit.
Five-year interest costs were calculated at £185,244 and £87,285 respectively – a difference approaching £98,000.
Marc von Grundherr (main picture, inset), director of Benham and Reeves, said: “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 mortgages should not automatically be considered a poor choice because they could provide the only realistic route to ownership for some borrowers.
Where saving a deposit remains achievable, however, brokers will need to help clients weigh the cost of delaying a purchase against the potentially lower rates, repayments and interest charges available at a reduced LTV.
