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No deposit mortgages

Tom Martin
Written by Tom Martin, Content editor

Edited by Samantha Downes, Content Writer, 29 October 2021

No deposit mortgages are mortgages that give you a 100% Loan to Value ratio (LTV), aimed at customers who do not have a deposit to put up to buy a home.
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No deposit mortgages

No deposit mortgages are mortgages that allow you to borrow 100% of a property’s value. This is known as a 100% loan to value ratio (LTV) mortgage and is aimed at customers who do not have a deposit to put up to buy a home.

No deposit mortgages were far more common before the financial crash of the late 2000s, but they do still exist. 

The introduction of affordability rules in 2014 is intended to head off a second financial collapse and make it harder to get a mortgage without a deposit. Anyone applying for a 100% LTV mortgage now needs to provide more documentation showing they can afford their monthly mortgage payments.

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No deposit mortgages currently often require a guarantor, such as a family member, who is willing to risk their savings or home to secure the mortgage. There is also the risk of having negative equity in your home if house prices fall.

What are no deposit mortgages?

For a while it was fairly common for many lenders to offer 95%, 100% and even 125% LTV mortgages.

As the name suggests, no deposit mortgages allow home buyers to borrow all of the money required to buy the property they want without any deposit.

At the start of the 21st century, some lenders were regularly offering 100% mortgages, despite the risks and drawbacks for the customer. Some even offered LTV mortgages of 125%, largely to first time buyers who wanted to consolidate credit cards or loans into their mortgage. When house prices fell and borrowers defaulted on their loans, the banks couldn't balance their books. This triggered a global banking crisis and a much more cautious approach to lending.

Should I take out a zero deposit mortgage?

One of the biggest risks of a no deposit mortgage, even when house prices are relatively stable, is that the property only has to drop slightly in value to push the property into what is known as negative equity.

What is negative equity and why is it more likely with a 100% mortgage?

Imagine if someone borrows £250,000 to buy a house. Then a year after the sale, there is a dip in the property market and the house is worth £240,000. The chances are that the homeowner now owes more money to the mortgage lender than the property is worth (unless they have somehow managed to pay £10,000 over that year). This is what is known as being in negative equity.

Should I get a mortgage without a deposit?

By paying a deposit you immediately have a stake in the property, even if you only get an 85% LTV mortgage.

Having a share in the property can help in the event that the value goes down because if you decide to sell your home to cover your losses, there's still a good chance your share will ensure you do not owe the mortgage lender more than you will get from the sale.

No deposit mortgages are still available, but they are now often tied to guarantor schemes and require much tighter checks.

Can I get a mortgage without a deposit?

You might be able to get a 0% deposit mortgage, but your income would need to be quite high and very reliable.

Banks are far less likely to take any risks lending 100% mortgages, but if they do, then customers need to make sure their credentials stack up against the very strict eligibility checks.

Since the Mortgage Market Review in 2014 which looked at ways to regulate the industry, lenders now look at the following criteria before approving any mortgages:

  • Your credit report and history

  • At least three months worth of payslips

  • At least three months of bank statements

  • Your current debt from credit cards and loans

  • Your lifestyle spending habits, such as subscriptions and how much you generally spend every month

Getting a mortgage with 0 deposit - what you need to do

The biggest change in mortgage lending in the last few years has come in the form of a check on how potential borrowers spend. So if you take out a mortgage without a deposit you would expect greater scrutiny of your lifestyle.

While lenders will take into account your income they will look at where your money goes, for example if you don’t have much money left in your account at the end of each salaried month, this is sometimes a red rag to a lender. 

  • This all falls under lenders' duty to ensure that customers are not put under undue risk of losing their money or home

  • You will find that not many mortgage providers will offer a 0% deposit mortgage for this reason.

Quite simply the bigger the deposit the lower the risk is to you and to the mortgage lender.

What do I need to do to get a no deposit mortgage?

Lenders that offer 0 deposit mortgages will want to make sure that they bear no responsibility or risk if you fail to keep up with the repayments or your home loses value and you have negative equity. Ideally you need to have:

A good credit score – to be in with a chance of getting a no deposit mortgage then you need a good credit score, this means you’ve kept up repayments of any credit cards or loans. You also need to be on top of utility bills.

An income that can cover repayments – while you don’t need to be earning a six figure salary you will need enough to cover not just repayments and bills but also enough to show that you are keeping money aside for an emergency.

A guarantor or a mortgage indemnity guarantee (MIG) – having this in place can help you  cover the lenders' costs if you fail to keep up with payments.

How do guarantor mortgages work?

Guarantor mortgages involve getting a friend or family member to put a certain amount of savings – the equivalent to what you might normally give as a deposit for a home – into an account managed by the lender.

The guarantor mortgage provider will leave that money in the account unless they need to recover costs because repayments have been missed or for the administration of repossessing your home.

Essentially a guarantor mortgage provides a guarantee to the lender that they can still provide you with a 100% mortgage with no deposit.

Your guarantor (the family or friend offering to help you) will promise to make payments for you in the event that you struggle to keep up.

In some cases the guarantor is required to put up their home as security, which would be a huge risk for them to take. Each mortgage provider is likely to have their own rules on what happens, so it is important that the guarantor understands the risks and the rules at each step of the way.

What are the risks of a guarantor mortgage?

The main risk of a guarantor mortgage is that you take one out without putting up a deposit, giving you a 100% mortgage.

Even a 95% mortgage has risks. Generally, mortgage providers are more likely to offer mortgages of 80% and below.

This is partly because you could owe them more money if your home falls into negative equity.

Your guarantor could be locked into an agreement where their home is used as security. If the worst were to happen both your home and theirs could be repossessed because you defaulted on your mortgage.

By not having a deposit, you also lose the ability to sell up and get that money back in times of need. While you will have cleared some of the loan through repayments, selling a house isn't cheap if you want to get full value, so you could be left with no home and very little to show for it.

Worse, if house prices fall, you could end up in a situation where even selling the house will not clear the debt you have to the bank without your guarantor's help.

Guarantor mortgages are also likely to have a higher rate of interest than standard mortgages, meaning it will probably cost you more in the long run.

What is a family assisted mortgage?

Family assisted mortgages are similar to a guarantor mortgage, but a family member puts a sum of money, equivalent to a house deposit, into a savings account linked to the mortgage.

The homebuyer is also likely to be required to put up at least a 5% deposit.

  • Taken together, this should bring your mortgage LTV down to a reasonable and less risky level – somewhere between 80% and 90%

  • Once you have paid off around 20% of your mortgage, your family member will get their money back in full – provided none of it had to be used to cover some of your payments

  • They may also get some interest on those savings but the rates tend to be much lower than traditional savings accounts.

  • Like other low or no deposit mortgages, the interest rates tend to be higher than the market leading mortgages

What is the government’s mortgage guarantee scheme

The mortgage guarantee scheme allows borrowers to take out a mortgage with just a 5% deposit. Under the scheme, the government agrees to guarantee the mortgages offered by the lenders who have opted to take part in the initiative.

It is open for new applications until 31 December 2022.

What other options are there for mortgage borrowers?

There are other schemes but you will need some kind of deposit for them:

  • The government's Help to Buy scheme makes it easier for first-time buyers to get a mortgage by offering a loan of 20% (40% in London) of the house's price which you can add to your own 5% deposit. This enables you to get a 75% LTV mortgage. However, it's important to understand the catches that come with this loan – effectively the government owns an equity share in your new home.
    Read more about help to buy.

  • The shared ownership scheme allows homebuyers to buy a share in a property. For example, you could buy 50% of your home, therefore paying only for half the value and putting up a far smaller deposit. You would pay off your mortgage and pay rent on the share that you don't own. You can increase your share in the property over time.
    Read more about shared ownership.

Getting help from your family to buy a home – tax implications

If a family member decides to give you cash to help with your deposit, then there are some tax implications to consider. Getting money from a family member can be really helpful, but if they die within seven years of giving you that cash then it could be subject to inheritance tax. In addition, it could be subject to capital gains tax depending on how your family member raised – for instance, if they got it by selling a property or business, this could be interpreted as disposing of assets.

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