Last updated: 23/07/2020 | Estimated Reading Time: 4 minutes
No deposit mortgages
Getting onto the property ladder can be difficult, especially with the large sums required for a deposit. No deposit mortgages can help by cutting out the need to save, but they are not as common and involve more risks than mortgages with a higher loan to value ratio (LTV). Our guide will take you through what a no deposit mortgage is, and whether it might be the for you.
In This Guide:
- What is a no deposit mortgage?
- What is a guarantor mortgage?
- What are the advantages of a no deposit mortgage?
- What are the risks of a no deposit mortgage?
What is a no deposit mortgage?
A no deposit mortgage allows you to borrow the full price of your property without any upfront deposit. This means you get 100% LTV with a no deposit mortgage. They are aimed at customers who do not have the deposit to buy a home, and can be an important first step onto the property ladder.
Following the 2008 financial crisis, no deposit mortgages are much less widely available. To get a 0% deposit mortgage from most lenders, your income will need to be quite high and very reliable. 0% deposit mortgages are now available only as guarantor mortgages, so there is also a great risk for your guarantor.
Before approving your mortgage, your lender will look at your credit report and history, at least three months of payslips and bank statements, any current debt from credit cards and loans, and now they will also want to look at your general spending habits and lifestyle. Whilst this may seem invasive, it’s due to the high risk involved in 0% deposit mortgages. Your lender will want to be sure that you do not default on payments before offering you a mortgage loan.
What is a guarantor mortgage?
It’s now normal for lenders to require a guarantor for a 0% deposit mortgage. A guarantor is a friend or family member who acts as a guarantee to the lender that your mortgage payments will be made each month. Your guarantor promises to make payments to you in the event that you are unable to keep up.
There are two ways that your guarantor can provide security to the lender. They may use their savings as security. This means the guarantor puts a lump sum into a savings account which is held with the mortgage provider. Your guarantor will not be able to withdraw the money until you have paid off a pre-agreed percentage of your mortgage.
Your guarantor can also use their own property as security. This would mean the lender has a charge against your guarantor’s property, and even puts them at risk of repossession if you fall too far behind on your payments.
It’s very important that you take time to consider the for you and whether a 0% deposit mortgage is affordable.
What are the advantages of a no deposit mortgage?
The main advantage of a no deposit mortgage is being able to buy a home without saving for a deposit. This is particularly beneficial if you are renting whilst trying to save. A 0% deposit mortgage could give you the opportunity to get onto the housing ladder without feeling like you are wasting money on rent.
No deposit mortgage can also be useful if you are an existing homeowner in negative equity. A 0% deposit mortgage could help you to move house or remortgage, and prevent you from becoming a mortgage prisoner.
Before considering this option, it is important to ensure you can afford the fees and interest of a no deposit mortgage! You can use our free online mortgage comparison tool to and ensure you are making the right decision.
What are the risks of a no deposit mortgage?
No deposit mortgages are riskier for you, your guarantor and your lender. This is why they are less widely available than high LTV mortgages. Whilst they can be a great opportunity to get you onto the housing ladder, it is important that you are aware of the risks before making a decision!
Because a 0% deposit mortgage requires a guarantor to use their home or money as security for your loan, the worst case scenario is both of your homes being repossessed if you default on your mortgage. This is almost always avoidable, but it’s important that both you and your guarantor are aware of this risk.
A 0% deposit mortgage puts you at a high risk of falling into negative equity. This means that if house prices drop, you may end up owing more than your property is worth. This makes it much more challenging and expensive to sell or move house. Saving for just a 10% deposit puts you at much smaller risk of this happening, and it may be worth considering whether this could be an option for you.
No deposit mortgages are normally more expensive than other . Interest rates and fees are also usually very high and because fewer lenders offer these mortgages, you will not have access to competitive interest rates. Make sure you can afford your payments before deciding upon a no deposit mortgage.