No deposit mortgages are by definition mortgages that afford you 100% Loan to Value ratio (LTV), and are aimed at people who have no cash for a desposit on a property but want to buy a new home.
This type of No Deposit mortgage was much more prevalent before the financial crash of a few years ago but they are still available on the market and are also still widely used amongst a certain sector of the house buying population. The one with no deposit for a mortgage but who still want to own their own house! This type of mortgage comes with quite a number of restrictions and are significantly harder to obtain than a standard mortgage with a lower LTV ratio of more like 60-80%.
No Deposite Mortgages: Facts at a glance
No deposit Mortages offer 100% LTV and no deposit required for the house buyer
They are onerous in their background checks and require a healthy salary, long term financial stability and lifestyle expenditure that they consider healthy when measured against income
Zero deposit mortgages require a guarantor. This involves the bank taking a charge on the guarantors property to cover often as much as 25% the amount they are lending.
Often the lending bank requires the guarantor to place a significant amount of savings in a low or no interest account with them to ensure funds are in place should payments not be made on time.
Deposit free mortgages are a very niche product. As a result there are few products available, interest rates will be higher than on standard mortgages and fees may be higher.
Negative equity risk is a big factor in this type of mortgage. If the housing market drops you could end up paying a mortgage for a sum that is far greater than your houses new valuation.
Mortgage Indemnity Guarantee – This is an insurance policy many lenders require you to take out, that covers their losses in the event that you default. You will have to pay the costs for this when taking a 100% LTV mortgage out.
Seek alternatives where possible – Government affordable home schemes for example are a great way to get on the ladder for people with small deposits. An inheritance gift from family given early is also a great way to get a deposit together. After all, if they have the money, your parents will hopefully see the logic on you getting on the housing ladder sooner. If this is not an option, then the no deposit mortgage may be the way forward, provided you have weighed up all the risks. See our comprehensive guide below for more information.
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There is an inevitable downside to taking out a no deposit mortgage, because they nearly always want a guarantor for example a family member (Mum, Dad?!) to put their cash on the line to safeguard the mortgage. The subsequent risk applies to all types of mortgages and that is the risk of a negative equity situation in the event that house prices take a nosedive.
So what exactly are no deposit mortgages?
Pre the financial crash in the UK it was quite commonplace for a number of lenders to have 90% or even 100% LTV mortgages available for buyers who had no deposit for a mortgage yet wanted to buy a property. This was despite the not insignificant risks to the property buyer because No deposit mortgages to come with much more risk than a standard mortgage.
Still one of the biggest risks to a no deposit mortgage, now, as it was pre financial bubble is that if the housing market overall goes down a lot, then the property could lose value and then the buyer is left owing more money to the mortgage lender, this being due to them now being in negative equity.
It is always best to try and raise some deposit, even if it’s not a big one. This is because by paying a deposit on the mortgage you have a large stake in the property already which also buys you a nice cushion in the unfortunate event that the property price takes a nosedive. That cushion means that there is less chance of you entering negative equity and therefore will help to ensure you do not owe extra to the mortgage lender.
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 on the market but you need to have a guarantor in place and there are stringent checks in place for applicants. Click here to compare No Deposit Mortgages.
How can I get a 0% deposit mortgage then?
There is a chance you can get a 0% deposit mortgage but it does require you to have a good and very stable income stream, with proof to match your claims. This is because Banks are reluctant to take any risks when lending 100% LTV mortgages and they want to be sure that your credentials match their very strict eligibility criteria.
Ever since the Mortgage Market Review in April 2014 which studied industry regulation, mortgage lenders look at the following factors before approving any mortgages:
- Minimum 3 months of payslips or 3 years accounts summary if you are self employed
- At least 3 months bank statements
- What you owe on current credit cards and loan outgoings (credit check will show this)
- How you live day to day including your spending habits, weekly outgoings and monthly outgoings.
Since the Mortgage Market Review the biggest changes are in the checks that the banks will do on your lifestyle assessment. They want to be sure you can afford the product and that their money is safe. Their main concern being there is no cushion of a deposit in the event of a housing market decline and the house is then in negative equity. That can leave you in a lot of unexpected debt and also the bank at high risk of losing a lot of money.
The lending changes all are aimed at making sure the bank doesn’t allow anyone to be at undue risk of losing their home or financial stability due to a lending decision.
To be able to get a no deposit mortgage you need to have a very good credit score and a large enough salary to cover the repayments. Another crucial factor is that you have a guarantor who puts their own money or house on the lines to guarantee to the bank that they will get their money back. Another less likely option is a MIG or mortgage indemnity guarantee which is in insurance policy to cover the lenders costs in the event that you cannot make the repayments on time. Sometimes this is in addition to a guarantor being provided.
What are guarantor mortgages?
These type of mortgages involves usually a family member (unless you have amazing friends!) to front up a certain lump sum amount in savings, which is normally equivalent to what you may give as a deposit so around 5-20% of the homes value, usually more than less when it comes to guarantor requirements. The lump sum amount is put into a secure account managed by the no deposit mortgage lender and it will be left there until the end of the initial mortgage deal term with little to zero interest being given on it.
The amount will be left there provided you do not start missing repayments or default totally on your mortgage payments. In the unfortunate event of this happening the bank can then use all or part of the guarantors money to offset their losses. By using this arrangement your guarantor is effectively guaranteeing they will make mortgage repayments for you if you struggle to keep up.
In certain cases the guarantor has to put their home up as security against your loan, which would be a big move for them to make. Quite rightly most parents (or even friends) are reluctant to do this and hence why this type of mortgage is in no means suitable for everyone. Bestloans.net advise you to read the small print of any product you are thinking of applying for, and being sure you understand the contract you are signing up for.
What are the risks with Guarantor mortgages?
The primary risk of this type of mortgage is that you are not putting up a deposit which is giving you 100% mortgage, making you very reliant on a stable housing market and stable economy. If the housing market drops then you will end up in negative equity straight away due to not having the financial buffer of a deposit.
Even mortgages with deposits carry risks, for instance a 5% deposit is not considered a lot towards a house purchase and will still need you to seek out niche products. 20% deposit and upwards is where the risks for both parties decrease (as you have a lot of equity in the house right away) and you can really shop around for the best mortgage deals.
As your guarantor may have to be tied into an agreement whereby their own home is used as security against yours, if things go really bad in a worst case scenario both of your homes could be at risk of being repossessed if you defaulted on your mortgage. This is clearly a terrible place to be and can ruin family relationships, so you must be very confident that both parties can afford payments should the economy take a downturn. Do not base your happy predications purely on a healthy economy, see if you can afford it if things went bad and you went into negative equity.
Your bank balance is also at risk with this type of mortgage, if you fail to make repayments they lender will be looking at all avenues to cover their shortfall.
Last but not least, because this is a niche product you will be paying higher rates than for standard mortgage deals and fees may also be higher.
Family assisted mortgages
These are very similar to a guarantor mortgage, but a family member deposits a sum of money in a a savings account controlled by the lender. This amount is typically 15% of the loan value, then the home buyer is also required to put up a small 5% deposit very often.
This effectively brings down your LTV level to a more acceptable level from the banks point of view of around 80% LTV.
When you have paid off around 20% of your mortgage loan, the very kind family member will get their money back in full as long as it has not been used to pay shortfalls in payments. They will receive little to no interest in most cases and if there is interest paid it will be far lower than on proper savings accounts.
A family assisted mortgage is also classed as a very niche product and as a result attracts higher than standard interest rates and possibly higher fees.
I only have a small deposit for a mortgage though, what other options are there?
If you cannot borrow any money for a deposit off family or very kind close friends , there remains a couple of options. One of the main ones being the governments help to buy scheme.
This scheme has various options that can help you in your quest for home ownership. The primary offering suitable for your needs may be the shared ownership option.
If you can’t afford to buy 100% of the house the, Help to Buy: Shared Ownership scheme offers you the possibility to buy a share of your home (between 25% and 75% of the value of the property) and then you pay rent on the remaining amount. When your finances allow, you can then buy more shares in the house.
In order to be eligible for the Help to Buy: Shared Ownership in England you must:
- As a household earn less than £80,00 per annum if outside London, or your household must be under the £90,000 earning threshold inside London
- be a first-time buyer, or you used to own a house but can’t afford to buy one now or are in shared ownership presently and looking to move.
With Help to Buy: Shared Ownership you can buy a new build home or one that is already built and on sale from housing associations. You’ll still need to take out a mortgage to pay for your share of the properties sale price. Shared ownership properties are always Leasehold.
Priority will be given only to military personnel through government funded shared ownership schemes. However, local councils with their own shared owner house building projects may have some priority groups, based on their local housing needs.
Other shared ownership options exist specifically for people with disabilities and older people (classed as 55+). To find out more contact your local help to buy agent here
Accepting cash from family members
If a family member does decide to give you some money to help you with a deposit for your new mortgage, there are some tax implications you should be aware of.
If the family member was to die within seven years of giving you the money, then you may be liable for inheritance tax on that amount. To that end it is better if your parents can help you with that money while they are younger if at all possible due to reduced risk or anything happening to their health during that 7 year period.
Also, dependant on how your family member raises the funds, they may be liable for capital gains tax on that amount. For example if your dad sold a small rental flat he had carefully maintained for the last 15 years, to help you fund your new purchase and maybe treat himself to a few cruises, he may be liable for Capital Gains Tax. This is something that you and your family member would need to clarify with a qualified account before taking any action.
Tales of doom from people who have fallen foul of 100% mortgages.
Back in 2007/2008 a large number of buyers signed up to buy a house at one of three Berkeley developments in London. These were Caspian Warf in Bow, Royal Arsenal Riverside in Woolwich, or Chelsea Bridge Wharf in Battersea. These people bought, as is common with such developments, ‘off plan’ in 2007 or early 2008, putting down a deposit of ten % with the balance due on completion.
Many of these individuals ended up facing financial ruin because the development company, Berkely Homes threatened to sue them for tens of thousands of pounds when the property market collapsed and values slumped.
In many cases the flates were valued at 40% less than the original purchase price and the mortgage offers were withdrawn which left buyers in the terrible position of having to find £100,000-£200,000 to make up the difference.
When some buyers could not make up the difference in price they were threatened with legal actionand the developers sent letters to them , stating that they would sue them for damages, breach of contract and would seek interest on their losses, plus costs for legal action. This was justifiable on the developers side as they stood to make huge losses, however for those oweing the money, it was a very expensive and stressful event that some will never have recovered from , either financially or emotionally.
No deposit mortgages – Buyer beware.