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No deposit mortgages

No deposit mortgages are mortgages that give you a 100% Loan to Value ratio (LTV). They are relatively rare today, although you can get mortgages without a deposit if you have someone willing to act as a guarantor.
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No deposit mortgages

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What are no-deposit mortgages?

No-deposit mortgages are designed for customers who want to borrow 100% of a property’s value and therefore need to take out a mortgage without a deposit.

But while zero-deposit mortgages were relatively common prior to the financial crash of the late 2000s, they are now a lot harder to get now. This is because stricter affordability rules were introduced in 2014 to prevent another financial collapse. 

Today, most lenders ask for a deposit of at least 5%, so the only real option for anyone in need of a 100% LTV mortgage is to take out a guarantor mortgage backed by someone, such as a family member, who is willing to risk their savings or home to secure the loan. 

Why can’t I get a no-deposit mortgage?

In the early 2000s, mortgages of this kind were quite common. 

Some lenders even offered 125% LTV mortgages aimed at first-time buyers who wanted to consolidate credit cards or loans into their mortgages. 

However, when house prices fell, and borrowers started defaulting on their loans, the banks couldn't balance their books, triggering a global banking crisis and a much more cautious approach to mortgage lending.

Should I get a mortgage without a deposit?

It would be risky if you did. With a no deposit mortgage, the value of the property only has to drop slightly to push the property into what is known as “negative equity”.

Paying a deposit means you immediately have a stake in the property, even if that stake is only 5% of the purchase price. 

As long as the value does not fall by more than 5%, you could, therefore, still sell your home to pay off your mortgage if the monthly repayments become unmanageable, for example. 

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

Imagine you borrow £250,000 to buy a house worth that amount. Then, a few months after the sale, there is a dip in the property market, and the house’s value falls to £240,000. 

The amount you owe on your mortgage is now greater than the amount you could earn by selling the house, meaning you are in “negative equity”. 

If you had bought the house with a 5% deposit of £12,500 instead, your property would still be worth more than your mortgage, which would have started at £237,500. 

Can I get a mortgage without a deposit?

There are still some options for people who need a 0% deposit mortgage; the two main ones are:

  • Guarantor mortgages

  • Family assisted mortgages

However, as a result of the 2014 Mortgage Market Review, you’ll also have to go through a range of checks to be approved for any mortgage. Criteria lenders look at during the application process include: 

  • Your credit report and history

  • At least three months worth of payslips

  • At least three months of bank statements

  • Your existing debts

  • Your lifestyle and spending habits

And as with any type of mortgage, you’ll be more likely to get a mortgage without a deposit if you have a high credit score, a regular income, and a healthy amount left over each month after paying off any existing debts.

How to get a no-deposit mortgage

As explained above, to get a 100% LTV mortgage - at the time of writing - you’ll need to convince a relative or friend to help you, usually by acting as a guarantor.

To do this, they’ll need to agree to pay any repayments you miss. They will also have to either:

  • Use their own home to secure your mortgage - meaning they could potentially lose their home if you default on your mortgage repayments. They will need a significant amount of equity in their home to do this

  • Place a certain amount - usually about 20% of the loan amount - of their savings into an account with the mortgage provider until you’ve paid off a predetermined percentage of your mortgage. They may get some interest on those savings, but the rates tend to be lower than they could get elsewhere. 

How do guarantor mortgages work?

Essentially a guarantor mortgage provides a guarantee to the lender that they can still provide you with a 100% mortgage with no deposit because they have other ways to recoup their losses if you start missing repayments.

Your guarantor – the family or friend offering to help you – promises to make payments for you in the event that you struggle to keep up (and may need to deposit a certain amount in a linked savings account for this purpose).

The guarantor is also required to put up either their own home or their cash savings as security, which is a big risk for them to take. 

However, rules vary between mortgage providers, 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 risks involved in taking out a guarantor mortgage are:

  • You have a 100% mortgage, meaning you could end up owing more than the property is worth if house prices fall

  • Your guarantor could lose his or her home (or savings) if you fail to make your mortgage repayments

You’ll also probably have to pay a higher rate of interest than on a standard mortgage, which will cost you more in the long run.

What is a family assisted mortgage?

Some banks and building societies also offer family-assisted mortgages, which tend to work in one of two ways:

  • A family member puts a sum of money, equivalent to a house deposit of say 20% of the purchase price, into a savings account that is offset against your mortgage

  • A family member allows the lender to take out a mortgage worth 10% of the amount you need to borrow on their home, meaning your mortgage is 90% LTV. With this type of mortgage, you then pay the 10% part off over five years and the rest off over the agreed term (usually about 25 years)

Pros and cons of a family-assisted mortgage:

  • 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 missed repayments

  • Savings in family-assisted mortgage offset accounts do not generally earn interest 

  • Like other low or no deposit mortgages, the interest rates tend to be higher than on 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 designed to help people buy a property. However, you will need some kind of deposit for all of them. The main options are:

The government's Help to Buy Equity Loan scheme

This makes it easier for first-time buyers to get a mortgage by offering a loan of 20% (40% in London) of the property price. By adding this to a 5% deposit, you can therefore get a 75% LTV mortgage. However, it's important to understand that the government will own an equity share in your new home - at least initially.

The shared ownership mortgage scheme

This allows homebuyers to buy a share, say 50%, of a property, meaning they need a much smaller mortgage and can put up a far smaller deposit. Under the terms of the scheme, you then pay rent on the share that you don't own at the same time as paying off your mortgage. If you can afford to, you can also increase your share in the property over time.

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

If you have a family member who can give you cash to help you raise a deposit, this can be a great way of avoiding having to limit yourself to zero deposit mortgages. 

But there are some tax implications to consider. 

If, for example, the family member dies within seven years of giving you that cash, then it could be subject to inheritance tax. 

Depending on how your family member raised the sum, it may also be subject to capital gains tax (CGT); if, for instance, they got it by selling a property or business, this could be interpreted as disposing of assets.

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