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100% No-Deposit Mortgages Explained
A 100% no-deposit mortgage is a mortgage you can take out without having any deposit saved up. It allows homebuyers to finance the entire price of the property they’re buying without contributing any form of downpayment.
This loan type is popular amongst first-time buyers, who don’t have the financial stability to afford a deposit. Instead of waiting to save up, they can join the property ladder earlier.
Normally, mortgage lenders ask for at least 5% of the property’s value as a downpayment. This 5% can be quite significant, depending on the property type and the income of the person looking to buy the property.
While no-deposit mortgages do help new homebuyers skip the initial saving step, these mortgage types do come with high interest rates and other downsides.
How does a no-deposit mortgage work?
Prospective homeowners can apply for a no-deposit loan through a mortgage lender. The lender will need to thoroughly assess credit scores, rent payments, and income levels. Once approved, the deal can be closed, and the new homeowners can start repaying the mortgage based on agreed-upon terms.
Each month, a small amount of this mortgage plus interest will be paid. In terms of the interest rate, you’ll probably have to pay between 5 and 7%.
How much can I borrow?
The amount you can borrow depends on the property you’re buying, how much you earn, and how much the bank allows. Generally, no-deposit mortgages allow you to borrow between 95% and 100% of the property’s value. Some banks have been known to approve 100% no-deposit loans valued at £600,000.
Some mortgage brokers calculate how much you can borrow based on how much your monthly rent payments have been over the last 6-12 months. The higher the rent you’ve been able to afford and successfully pay on time, the bigger the mortgage you can take out.
What type of home can I buy with no deposit?
Normally, no-deposit mortgages are used to purchase first homes. First-time buyers don’t tend to have as much money saved up as those who are further up the property ladder, so no-deposit loans make sense to them.
This means that most no-deposit loans are spent on cheaper homes, such as flats or terraced houses. If you get approved for it, you could potentially buy a newly built property. This would justify the high-interest payments of your mortgage, given that the value of the property will likely increase as the years go on.
Are no-deposit mortgages available in 2023?
Before the 2008 financial crisis, no deposit mortgages were widely available. At that time, you could even get no-deposit loans that were valued at 125% of the property’s value. After 2008, no deposit mortgages stopped completely as they were deemed too difficult amongst lenders.
However, more mainstream mortgage lenders have started to offer no-deposit loans again in 2023. This is likely due to how difficult it has become to buy a home in recent years. House prices and rent prices are continuing to soar, which means that expected deposit prices have also risen. This all makes no-deposit mortgages more appealing.
Where can I get a no-deposit mortgage?
More high street banks and challenger banks are beginning to offer no-deposit loans in 2023. 2023 has been the first year where no-deposit loans have been available since 2008. However, they still only make up a minor amount of the total number of approved mortgages in the UK and all come with a more difficult application process than they did pre-2008.
No-Deposit Mortgage Eligibility Requirements
There are stricter eligibility requirements for no-deposit loans than there are for other mortgage types. You could enlist the services of a mortgage broker to determine whether you meet a specific lender’s criteria, and also help you complete the no-deposit mortgage application. The main eligibility requirements you need to be aware of are:
Rental payments
You need to prove that you’ve been renting a property for at least 12 months. You’ll need to have made all your rental payments on time for your no-deposit mortgage to be approved. This proves that you’ll be able to keep on top of mortgage payments. In addition to rental payments, you’ll also have to prove your ability to keep on top of utility bills and council tax.
Property owner status
For a 100% mortgage, you’ll likely need to be a first-time buyer. Most lenders only grant this mortgage type to those who have never owned a property and have been renting up to this point. However, some lenders grant this loan to previous homeowners who haven’t owned a property in the last three years.
Credit score
Like all mortgage types, the better your credit score, the more likely your mortgage application will be approved. Good credit scores also open up your lender options. If you don’t have any credit history at all, it would be a good idea to get a credit card and start using it responsibly. This will boost your chances of getting your 100% mortgage approved.
Affordability assessment
Mortgage lenders will assess your current income, employment status, and financial records to determine whether or not you meet their criteria of affordability. This will prove whether or not you’ll be able to manage the mortgage repayments.
Age
You need to be over the age of 21 to apply for a no-deposit 100% mortgage.
Different Types of Low Deposit Mortgages
There are two types of 100% mortgages. These are created to ensure that monthly mortgage payments are made.
Guarantor mortgages
For this 100% mortgage type, you can choose a family member or close friend to sign up as your loan guarantor. If you fail to keep up with the mortgage repayments, or you pay too little for one or more of your monthly repayments, the guarantor will pay to cover you.
If the guarantor fails to make up the shortfall, they risk having their own home repossessed.
Family deposit mortgages
For a family deposit mortgage, you pick a family member to act as your guarantor, much like a guarantor mortgage. However, the main difference is that this family member is required to put funds aside to cover any missed mortgage repayments. Normally, the guarantor is expected to put aside 10% – 20% of the property’s value.
This amount is normally stored in a specially created savings account, which the family member can’t touch for around five years.
If the borrower keeps on top of the mortgage repayments, the family member can have their savings returned plus any interest accrued.
No-Deposit Mortgage Risks
Of course, the cost of getting a no-deposit mortgage is taking on several associated risks. The main risks of low-deposit loans include:
Negative equity
Negative equity is what happens when you take out a mortgage and the value of the property falls. The risk of this bad equity is higher with 100% mortgages. Without a deposit, the amount of equity you have is lower than it would have been had you put down a deposit.
Negative equity is bad for the homeowner because once you’ve paid off the home, you’d still be in debt to the lender. You also may be reluctant to sell the property, as you’d make a loss.
High-interest rate
If the property you’re buying is worth a lot, and the interest rate is high, you could end up paying much more than you would have had to if you had saved up enough for a deposit. This loss of money is made particularly worse if you fall into negative equity. Overall, there’s a big risk of losing a lot of money by taking out a no-deposit mortgage.
Family deposit mortgage risks
If you default on your 100% mortgage repayments, you could cause a serious financial burden on your family member. Plus, in worst-case scenarios, you could even cause your family member to lose their house. This could lead to you being in debt with this family member in the long term.
No Deposit Mortgage Alternatives
If you’re put off by the risks involved in low-deposit mortgages, there are other low-downpayment mortgage alternatives to choose from.
Guarantor Mortgages
It’s possible to get a guarantor mortgage with a low deposit requirement. Guarantor mortgages are recommended to those who don’t have a large deposit saved or have a bad credit score. Getting a friend or family member to sign on as your guarantor can help you keep your downpayment low.
Lifetime ISA (LISA)
Lifetime ISA is a tax-free savings account which provides you with a 25% bonus should you use the savings account to buy your first home. This 25% bonus could significantly reduce the amount you’ll pay for a deposit.
Shared ownership mortgage
This mortgage type allows you to buy the majority of your house (normally between 25% and 75%) and rent the rest of your house from the housing association. Shared ownerships normally only require a 5% deposit.
FAQs
Can I buy a house in the UK with a low deposit?
It is possible to get a mortgage in the UK with a low deposit. However, you’ll definitely need to have a good credit score, a steady and significant income, and potentially a guarantor. Besides low-downpayment mortgages, it is also possible to get a no-deposit 100% mortgage in 2023.
Final Thoughts
A 100% mortgage is popular amongst those who don’t want to save for a deposit. By taking out a zero-deposit mortgage, you can skip straight to being a homeowner. However, there are quite a lot of risks involved, including falling into negative equity and the high interest rates associated. This could see you paying much higher than the purchase price of the home in the end.
Additional sources:
https://www.moneysupermarket.com/mortgages/100-mortgages/
https://www.thetimes.co.uk/money-mentor/article/100-mortgage-uk-first-time-buyer/
https://www.zoopla.co.uk/discover/property-news/100-mortgages-are-back/