What is a No Deposit Mortgage?
Some mortgage providers offer mortgages to borrowers who don’t have a deposit but, of course, lenders don’t give out these types of mortgages willy nilly and there is strict eligibility criteria.
Here’s what you should know about no deposit mortgages.
Can you get a mortgage with no deposit?
Yes, it is possible to get a no deposit mortgage, but they’re rather rare thanks to the financial crisis of 2007-2008 when housing prices plummeted, leaving many borrowers with negative equity.
Most lenders will prefer and require a minimum 5% deposit towards a property’s purchase price but they will occasionally offer a 100% mortgage, but only if you have back up.
You might like to read: The stages of purchasing a house (UK)
How to get a mortgage with no deposit
So, let’s cut to the chase and tell you how to go about getting one of these elusive mortgages.
A guarantor mortgage
At the moment, the only nil deposit mortgages on the market are guarantor mortgages meaning you will need a suitable guarantor to be a party to the mortgage.
A guarantor is typically a solvent family member (but can be a very good friend) who either owns their own property or has a large stash of savings available to offer as security for the mortgage.
The guarantor will need to sign the mortgage paperwork to legally guarantee that in the event you stop paying or can’t afford to pay your mortgage, they will step up and pay your mortgage on your behalf instead.
The reason a guarantor will need to own a property or have a lump sum of savings is because one of these ‘assets’ will be used as security to secure the mortgage with the lender.
Property as security
When a guarantor’s property is used as security, to make the arrangement between the guarantor and the mortgage lender official, the mortgage lender will register a legal charge with the Land Registry against the guarantor’s title deeds (now more commonly known as the registers of title).
This legal charge will be shown in the ‘charges register’ of the guarantor’s property’s registers of title and in the event that you and your guarantor both fail to keep up with the mortgage payments, the lender can exercise their right under their registered legal charge and force your guarantor to sell their property to pay off your mortgage debt.
Savings as security
If your guarantor does not own a property but has sufficient cash savings, they can instead offer these savings up as security. Your guarantor will have to pay a lump sum into a savings account held by the lender and this money will be squirrelled away by the lender until you have reduced your mortgage liability by a sufficient percentage.
In addition to having a guarantor, to be eligible for this type of mortgage you should ideally have a:
- Good credit score and history
- Nominal amount of debt or ideally, none at all
- Secure, long-standing job with a regular income
Read more: What is a Guarantor Mortgage?
Can you get a no deposit mortgage without a guarantor?
No, we’re sorry to say you can’t right now. As mentioned above, the only nil deposit mortgages currently being offered by lenders are all guarantor-only mortgages and there’s no wiggle room on that for now.
What is a 100% mortgage?
A 100% mortgage (also known as a 100% LTV mortgage*) is exactly the same as a nil deposit mortgage in that you borrow 100% of a property’s purchase price/value instead of paying a deposit.
* LTV = Loan to Value (read: ‘How is interest calculated on a mortgage’ to find out what Loan to Value means).
The pros and cons of a 100% mortgage
Here’s a quick summary of the benefits and disadvantages of a 100% mortgage:
|If you’re struggling to get a foot on the property, a first time buyer mortgage no deposit can be a great solution - you can become a property owner sooner rather than later and don’t have to wait years while you save up a pesky deposit.
|It’s near impossible to get a no deposit mortgage bad credit, even if you have a high income and a guarantor. Sadly, a low credit rating and a chequered credit history can make getting a 100% mortgage very difficult.
|You could risk ruining a close relationship by asking a family member or friend to be your guarantor, especially if, at a later date, you lose your income and they have to use their savings or sell their property to pay your mortgage! Aargh!
|100% mortgages tend to have higher interest rates and application fees, and you may additionally be charged a ‘higher lending charge’ on top of all the usual charges you have to pay when you get any type of mortgage.
|You can easily fall into negative equity if house prices fall. Bear in mind covid-19 has caused house prices to increase to an all time high and properties could easily drop in value again like they did back in 2007/2008.
What are your options if you can't get a 100% mortgage?
If you can’t find a guarantor to get a 100% mortgage, other alternatives include:
New builder development loans
New build developer mortgages allow you to temporarily borrow money to build a property from scratch which, once fully constructed, can then either be sold or mortgaged to pay off your temporary loan.
Help to buy
If you can scrape together a 5% deposit, the recently launched Help to Buy: Equity Loan scheme makes buying a house more affordable for first-time buyers. The government will have an equity share in your property up to 20% (40% in London) until such time as you repay the equity loan back in full.
This is where you only buy a share in a property and pay rent on the remaining share. The percentage share you buy is typically between 25% to 75%, however, there are some homes where you can buy as little as a 10% share.
Read more: Is shared ownership a good idea?
First time buyer mortgage
Under the new 95% mortgage scheme, many lenders are now offering first-time buyer mortgages to borrowers who only have a 5% deposit. There is also a First Homes Scheme where you can get 30% off the market value of a new build home.
Right to buy mortgage
If you’re currently renting a council house or a housing association property that was formerly a council house, you might be able to buy your home at a heavily discounted price thanks to the Right to Buy scheme. Click here to find out if you’re eligible.
Two or more salaries are better than one so if you’re not in a long-term relationship, you could think about approaching a family member or close friend(s) to see if they want to jointly apply for a mortgage with you.
Check your credit score!
Before applying for a mortgage you must check your credit score and history as a low credit score can have a negative impact on your chances of success.
Lenders use one or more of the three main Credit Reference Agencies (CRAs) in the UK to check how well an applicant has managed credit in the past so you need to check your credit record with all three agencies before applying.
The quickest and easiest way to simultaneously get a credit report for all three CRAs is by applying for a multi-agency report on checkmyfile.com.
Bear in mind that if you apply for a mortgage and your application is declined, a hard check will show on your credit report and will lower your credit rating for up to three months. This could make further borrowing challenging and if you do manage to get any credit, a low credit score can mean higher interest rates.