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No deposit mortgages

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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Person with empty wallet and no deposit for their mortgageNo deposit mortgages

No deposit mortgages were far more common prior to the financial crash of the late 2000s, but they still do exist on the market today. However, they come with a few more restrictions and are therefore much harder to get than a mortgage with a lower LTV of around 60-80%.

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There are also a few drawbacks to taking out a no deposit mortgage, as they often, these days, require a guarantor such as a family member to risk their savings instead to secure the mortgage. There is also the risk of having negative equity in your home if prices go down.

What are no deposit mortgages?

For a while it was fairly common for many lenders to have 95% and even 100% LTV mortgages available.

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

At the height of the housing bubble at the start of the 21st century, some lenders were regularly offering 100% mortgages, despite the risks and drawbacks for the customer.

One of the biggest risks of taking out a no deposit mortgage, even back then, was that the property could lose value and leave the customer owing more money to the lender, as a result of having negative equity.

By paying a deposit you immediately have a sizeable 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 so that if you decide to sell your home to cover your losses, there's a good chance your share will ensure you do not owe extra to the mortgage lender.

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

Can I get a 0% deposit mortgage?

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 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

The biggest change comes in the form of checks on your lifestyle spending. Lenders no longer simply rely on your income. How you spend your money that is not used to pay your monthly mortgage repayments is almost just as important.

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

Therefore you will find that not many mortgage providers will offer a 0% deposit mortgage. The bigger the deposit the lower the risk is to you and to the mortgage lender.

Those that do 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.

To be in with a chance of getting a no deposit mortgage then you need a good credit score, a large enough salary to cover the repayments and likely a guarantor or a mortgage indemnity guarantee (MIG) to 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 - 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 from you for not keeping up with repayments 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 require 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. Therefore, in a worst case scenario their home and your home could be repossessed if you defaulted on your mortgage.

Your bank balance is also at risk - more risk than if you had a deposit - as there would be no backed up savings to give you equity upfront and help make some money back if you needed to quickly sell to keep up with repayments.

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.

Family assisted mortgages

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 home buyer is also likely to be required to put up at least a 5% deposit.

Together the money combined should bring your mortgage LTV down to a reasonable and less risky level of 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 too but the rates tend to be much lower than traditional savings accounts.

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

What other small deposit options are there?

If you aren't able to get money from a family member as a loan or gift, or a guarantor, there are other small deposit options, including ones run by the government.

Meanwhile, the government's Help to Buy scheme makes it easier for first time buyers to get a mortgage with their deposit boosting equity loan of up to 20% (40% in London). However it's important to understand the catches applied to this loan

There is also the shared ownership scheme where you can buy a share in the property. For example, you could buy 50% of the home, therefore paying only for half the value and putting up a far smaller deposit.

You would pay off your mortgage and pay for rent on the remaining share you no longer own, but you could increase your share in the property over time.

Getting direct help from family

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 gifting you that cash then it could be subject to inheritance tax.

In addition to this, depending on how your family member decided to raise the money (through selling a property or business, for example) then it could be subject to capital gains tax, as this could be interpreted as 'disposing' of assets.

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