Rising house prices, rising rents, a cost-of-living crunch and the imminent end of the government’s Purchase Assistance Scheme are making it difficult for London buyers to save on a deposit, which cost an average of more than £151,700. Last year, according to the Financial Times.
There’s probably some light at the end of the tunnel: New Proportunity has announced a zero-mortgage product, intended to help those who can’t raise the 5 percent deposit that many mortgage providers insist on as a minimum.
The company plans to introduce a zero-deposit scheme as part of its existing offerings, helping clients access the financing they need to get on the real estate ladder with a mortgage enhanced loan.
This loan is repaid on the basis of interest only and the principal amount does not need to be repaid until the buyer finally sells his property, hoping to make a profit.
To date, the company has funded more than £100m of homes and helped more than 260 people in the property market.
Sarah Tucker, founder of The Mortgage Mum, says the program’s main advantage is clear: helping thousands of first-time buyers get up the real estate ladder before they would otherwise get it.
But, like anything that sounds too good to be true, there are caveats.
The success of the scheme depends on the property’s increasing value over time.
Proportunity has created a complex piece of technology, called the Proportunity Home Index (PHI), that identifies undervalued and overvalued homes so buyers can make smart decisions and accurately assess a property’s potential.
More than 150 data points are analyzed, including property size, crime rates, transportation connections, and energy performance sources.
Gerard Boon, managing partner of Boon warns brokers.
The importance of accurate PHI is increased when there is no deposit and financial resources are carefully balanced.
There is also the question of how mortgage providers, who never enjoy the risk, will interact with a Proportunity-funded no-deposit application.
“I would expect lenders to be skeptical at first until they see positive results for the scheme at scale,” Boone says.
“The scheme could bring back disturbing memories of mortgage products 100 percent to value delivered before the 2007-2008 financial crisis, which ended in catastrophe and negative equity on a massive scale.”
While it has been touted as an alternative to the equity purchase assistance loan and aims to fill the £4.4bn gap left when this expires in October, there are some differences to be aware of.
The Proportunity scheme requires no deposit, there are fewer restrictions 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 proves successful, there are potential rewards for those willing to take the risk.