Getting onto the property ladder can be difficult, especially with house prices rising so quickly in recent years.
However, this does not mean that you have to give up your dreams of being a homeowner as there are plenty of options available for mortgages and buying schemes.
For many, the most common issue seems to be saving the money for a deposit. If you are finding this to be the case, a no deposit mortgage may be for you. This type of mortgage allows you to borrow the money you need to cover the cost of a property without having to save a lump sum.
In this article, we will cover what a no deposit mortgage is and what you need in order to be eligible for one. Additionally, we will look at alternatives if you find that a zero deposit mortgage is not for you.
Can I get a deposit free mortgage?
Deposit free mortgages are not as common as they used to be and lenders are far more selective in providing them. Therefore, in order to be accepted there are various strict eligibility requirements you need to have covered. First, however, we will start with:
What is a no deposit mortgage?
A no deposit mortgage is also known as a 100% loan to value ratio (LTV) mortgage, and it allows buyers to borrow the full amount of money towards a property. This is different from a standard mortgage where the lender will usually require a deposit of at least 5% of the property’s value.
No deposit mortgages are sometimes referred to as guarantor mortgages. This means lenders will require you to have a guarantor in order to be accepted for one. A guarantor is a family member or friend who is a homeowner will be named on the legal documents for the mortgage and be responsible for any missed repayments.
Advantages of a no deposit mortgage
The main advantage of a zero deposit mortgage is that you do not need to spend time and effort saving a deposit in order to buy a property.
Disadvantages to a no deposit mortgage
There are a few drawbacks of taking on a zero deposit mortgage including:
- The smaller your deposit, typically, the more expensive your mortgage repayments are.
- There are fewer options for mortgage brokers as this type of mortgage is not as willingly provided due to the higher risk associated.
- You may end up in negative equity if house prices drop below the amount you have borrowed. You will still be required to repay the full amount loaned and the interest accrued.
- Higher interest rates as it is riskier than a standard mortgage loan.
- If you default on payments, your guarantor will be expected to cover the repayments, possibly at the cost of their property or savings.
- Without a deposit, you have no immediate stake in the property. If the property value decreases, you may need to sell your home and therefore without a share in the property, you could incur extra costs by owing the mortgage lender the full amount of the property’s value.
Can I get a mortgage without a deposit?
Being accepted for a zero deposit mortgage is rarer but it is definitely possible. A mortgage lender will carry out stringent checks to make sure that you fulfil the necessary requirements and have lower levels of risk when you borrow money. The criteria for being accepted for a mortgage include:
- A good credit history
- A minimum of three months of bank statements
- A minimum of three months’ worth of payslips
- Information on existing debts from credit cards or loans
- Information on spending habits
In addition to the standard requirements, you will need a guarantor to be accepted for a zero deposit mortgage.
How can I get a mortgage offer without a deposit?
In order to take out a mortgage with no deposit, lenders require the security of other assets before they will accept a contract.
As mentioned, 100% mortgages require a guarantor who agrees to make up for any monthly repayments that are missed. They will also need to provide one of the following:
- Their home as security – in extreme situations, if you miss payments, your guarantor’s home can be repossessed to cover the costs.
- Their savings as security – your guarantor will need to put a sum into savings with the mortgagee company. They will not be able to access these savings until a specified amount of the mortgage has been paid off.
What do I need to be accepted for a no deposit mortgage?
There are several factors that are taken into consideration before you are accepted for a no deposit mortgage. Seeing as there is a higher risk associated with borrowing larger amounts of money with no deposit, a mortgage broker will look for the following as good indicators that you will be able to keep up with repayments:
Having a good credit score
Having an excellent credit score means you have a history of repaying loans and bills, which shows you have borrowed money and consistently paid it back. For mortgage brokers, this is particularly important as they will not want to provide a mortgage when you have defaulted on previous loan repayments.
A salary high enough to cover repayments
To be accepted for a no deposit mortgage, you do not need to have a massive salary, just enough to cover repayments and to show that you have put some money aside in case you need it at a later date.
No deposit mortgages require you to have a guarantor as they are high risk and the lender needs to know there will be repayments.
Your guarantor can help you by signing your mortgage using their own property as security, or by putting the amount of money for a deposit into a savings account held by the mortgage broker.
How much can I borrow for a no deposit mortgage?
As a general rule, the amount you can borrow is between 4-4.5 times your annual salary before tax. The actual amount you can borrow will be based on your individual circumstances and the risks associated. Lenders will use the aforementioned criteria as a basis to decide on the amount you can borrow.
If you apply for a mortgage with another person, say a partner or friend, both your salaries will be taken into consideration meaning you may be able to borrow more than if you take out a mortgage as an individual.
How much interest will I be charged on a no deposit mortgage?
Again, the amount of interest will be dependent on your individual circumstances; usually the higher the risks, the higher the interest charged. For example, having existing debts can increase the interest you are required to pay as you are considered more likely to default on payments.
Would having a mortgage deposit reduce my mortgage repayments?
Generally, the more you can put aside for your deposit, the less your monthly repayments will be. Zero deposit mortgages are also still subject to the same interest charges and fees as a standard mortgage.
Are there any alternatives to a no deposit mortgage?
Zero deposit mortgages can be tricky to be accepted for, therefore you may need to find an alternative. Other options include:
Help to Buy: Equity Loan
A new Help to Buy scheme was introduced in England on 1 April 2021 and will run until March 2023. This loan is specifically for first-time buyers over the age of 18 and is designed to help those who are unable to afford a loan or mortgage due to having an insufficient deposit.
The scheme lends first-time buyers up to 20% ( this is up to 40% in London) of the cost of a new-build house. The scheme has different price limits depending on the region in England which are as follows:
|Property price limit
|Yorkshire and The Humber
If you are unable to afford 100% of a mortgage, there is the option of Shared Ownership which allows you to buy a share of your property and pay rent on the remaining amount. The scheme allows you to buy between 10% and 75% of the property value with the remaining share of the property being available to buy at a later date when you can afford it.
To be eligible to apply for Shared Ownership in England you will need:
- A household income of £80,000 or less (£90,000 or less in London).
- To be a first-time buyer, a previous home-owner who cannot afford to purchase one now, or to be a home-owner with a Shared Ownership property who is looking to move.
First Homes Scheme
These are specifically for first-time buyers and keyworkers looking to purchase a property in their local area. The scheme is available for those buying a new-build flat or house on a new development, available for sale with a discount of around 30%.
The scheme is excellent for people who want to stay situated in their local area but have struggled to afford a property. One thing to note, however, the property and discount must then be passed on to fellow keyworkers or first-time buyers.
Low Deposit Mortgages
For those who have not been accepted for a mortgage with no deposit, an alternative is to apply for a low deposit mortgage. These are good first time buyer mortgages as you can cover 90-95% of the property’s value with a loan and only have to find a small amount for the deposit, which is much more achievable for most home buyers.
In order to be eligible for a low deposit mortgage, the requirements are:
- You must be a first-time buyer or a home mover.
- The property needs to be your main residence and have a purchase price of less than £600,000.
- You cannot use the scheme on second homes, new builds, or buy-to-let properties.
With the addition of the mortgage guarantee scheme, low deposit mortgages are far more accessible making them a great alternative for those not able to get a zero deposit mortgage.