Lots of people can afford mortgage repayments but the hefty deposit requirements of some lenders make it simply unattainable and unrealistic for many, especially those on a low income, with debt, or those paying for high outgoings like childcare or a commute to work.
That was of course until no deposit guarantor mortgages and low deposit mortgages started to make a comeback.
Increasingly so since 2021, lenders have started to ease the tightening of mortgage criteria while also offering agreements that require no deposit or a 5% deposit.
Before you beam and gleam about the prospect of buying a home without a deposit, there are some pros and cons for you (and your guarantor) to carefully consider.
This no deposit mortgage guide includes:
- What is a 100% LTV mortgage?
- Are no deposit mortgages risky?
- Can a 100% mortgage help me buy a house?
- How does a 100% mortgage work?
- How would having a deposit for a mortgage reduce my mortgage repayments?
- How does a guarantor mortgage with a 0% deposit work?
- How much interest will I be charged for a zero deposit mortgage?
- How much can I borrow for a zero deposit mortgage?
- Single person’s 100% mortgage vs joint 100% mortgage for two
- Am I eligible for a no-deposit mortgage?
- Is a zero deposit a good idea?
- What are the alternatives to a zero deposit mortgage?
- No deposit mortgages FAQs
What is a 100% LTV mortgage?This is a mortgage contract that agrees to provide you with the finance for 100% of a property’s value. LTV stands for loan-to-value so if you have no deposit, you need a 100% LTV mortgage and therefore, your LTV rate would be 100%.
If you had, say, a 5% deposit, your LTV would be 95%, because you have 5% of the property’s value upfront.
That would also mean that you would have 5% equity in your property at the beginning of your mortgage. As you pay your mortgage, you increase the amount of equity you own i.e the value of the property that you have paid for.
Getting a mortgage without cash is tricky though and currently, not possible unless you have a guarantor who uses their savings or property as security.
Are no deposit mortgages risky?If you have no deposit, you own no equity upfront and that potentially puts you in a venerable position. Outside factors like changes to the property market and a decrease in property values could each leave you owing more money to your lender than your house is worth.
For example, if you had a 100% mortgage for a £200,000 house and property prices decreased by 5%, you would owe your bank £200,000 while your property would only be worth £190,000.
If you had to sell your house because a change in your circumstances meant you could no longer afford the repayments, you would still owe your lender £10,000 after selling up.
No one can predict property prices for the future as so many factors affect this.
Furthermore, an increase to the BoE base rate can make interest rates for mortgages increase, depending on whether your mortgage rate is fixed or variable.
If your mortgage rate followed the BoE base rate and interest rates increased, your mortgage repayments could increase to an unaffordable level. If you become unable to repay the full amount owed each month, having negative equity on top of this could result in your eventually having your home repossessed to recover the debt.
Can a 100% mortgage help me buy a house?Zero percent deposits aren’t necessarily a bad thing, despite the risk they carry. Before you can take out a mortgage, your affordability for the loan amount you’re asking for and whether you can afford it under the circumstances of the agreement will be checked thoroughly.
It’s not in a mortgage lender’s interest to provide a loan that is unaffordable because they’ll want their repayments on time and in full.
A 100% mortgage may well be affordable for you based on your circumstances and if so, this option can help first-time buyers and next-time buyers, purchase property without the need for a big deposit.
The issue that some borrowers face is that zero deposit mortgages typically come with more restrictions that can make qualifying for them tricky, and more expensive in the long run.
Furthermore, many zero deposit mortgages require a guarantor who may need to use part of their savings or their home, as security for the mortgage.
How does a 100% mortgage work?Mortgages are charged with interest and usually the more you borrow and the lower your deposit, the higher the interest rate.
That’s not always the case but nevertheless, without a deposit, you’ll need to borrow more. If you had a 100% mortgage over 25 years, for £200,000 and your lender charged you a hypothetical rate of 5% in interest, your monthly repayments would equate to £1,170.
However, you may find that if you had a deposit or a guarantor who can use their savings or property as security, you could be eligible for a lower interest rate mortgage which reduces your monthly mortgage repayments.
How would having a deposit for a mortgage reduce my mortgage repayments?If you had a 5% deposit, as opposed to a zero deposit, that same lender or a different lender completely, might agree to charge a lower rate of interest. However, even if you were charged the same 5% interest rate, by having a 95% mortgage you reduce your loan-to-value.
Using the example above which represents a £200,000 mortgage over 25 years, with an 07952048285 interest rate of 5%, we can see that a 5% deposit would reduce the overall mortgage by £10,000, leaving a debt of £190,000. Therefore, your mortgage repayments would equate to £1,111 instead of £1,170.
How does a guarantor mortgage with a 0% deposit work?A guarantor mortgage usually requires a relative or friend to deposit some of their savings into a special account to be managed by the lender, to be used as security for your mortgage. Some guarantor mortgages allow the guarantor to earn interest while the savings are held as security though this varies between lender agreements.
Your guarantor might be your Mum, Dad, or a grandparent with savings that they don’t need immediate access to. By agreeing to be your guarantor, the family or friend offering to help your promises to make payments for you in the event that you can’t. If you fail to make a repayment for your zero deposit mortgage, you’ll be defaulting on your loan.
Defaulting on a mortgage could negatively impact your credit score and would put your guarantor’s savings at risk.
Can my guarantor use their home as security for my mortgage?A selection of UK guarantor mortgage lenders also allows guarantors to use their home as security for a 0% deposit mortgage but this carries great risk for the guarantor who could lose their property as a result of you falling behind on your mortgage repayments.
How much interest will I be charged for a zero deposit mortgage?The amount you’re charged in interest isn’t just reliant on your ability to meet deposit requirements (if the lender has any). Your circumstances as a whole affect this and usually, the higher risk you present as a borrower, the higher the interest rate you can expect to pay.
Factors like how much debt you have and your income can affect the rate you’re charged. Lenders agree to take on the risk that you might default on your mortgage and the additional risk of providing a 100% loan. This can come at a cost, so typically interest rates aren’t as cheap when compared to mortgage products that require a deposit.
If your circumstances do present a heightened risk for lenders, your choice of mortgage products can also be reduced. That’s because factors like bad credit and a low credit score can result in an instant rejection with some lenders, who prefer their borrowers to have a good credit history that indicates a pattern of careful borrowing and repaying.
Some zero deposit mortgage lenders may also require you to have a minimum annual income and usually, having a higher income can open up your choice of lenders and their more competitive rates.
How much can I borrow for a zero deposit mortgage?Again, your own unique circumstances will determine that. Your income will play a big part in your ability to meet lending requirements for a wider range of lenders but if you have a low income, there may still be options available to you, especially if you have a guarantor or have a good credit score.
Lots of people worry that their income isn’t enough to get a mortgage but there are affordable homes schemes like Shared Ownership that can make homeownership more of a reality.
If you’re keen to buy a whole house rather than a share and then buy more as you go, your income may still allow you to do so with a zero deposit mortgage so ask a broker to check your eligibility so you know what your options are and what you can do next.
If you’re applying for a mortgage with someone else, remember that both of your incomes will be taken into consideration for the maximum loan amount you can apply for.
When mortgage lenders calculate your maximum loan, they’ll probably use an income multiple between 4.49 - 6.5. Essentially, they’ll multiply your annual income (before tax) by this number to calculate the maximum amount they will loan you.
Single person’s 100% mortgage vs joint 100% mortgage for twoLet’s say you have an income of £18,000 and a lender agrees to loan you 4.9 x that once you’ve passed their eligibility checks. Your maximum loan could equate to £80,820. That might not allow you to stretch to buying the home you’re hoping for which is why some people decide to either part-buy, part-rent, or to get a joint mortgage.
Applying for a 100% mortgage with a partner, friend, or relative boosts your borrowing power.
If you had that same £18,000 annual income and the other person getting the mortgage had a £20,000 income, both incomes would be included within the lender’s calculations, so your joint maximum loan could equate to £170,620.
Am I eligible for a no-deposit mortgage?To make sure that you can afford your mortgage repayments, a mortgage lender will also analyse your spending habits.
They’ll look at your monthly outgoings on top of your current debts, so things like Netflix subscriptions, gambling, and frequent shopping splurges, can cause some lenders to conclude that the amount of mortgage you’re applying for might be too risky and unaffordable based on your spending behaviour.
Speaking to a mortgage broker before you make an application can be a good idea.
Send a trusted and reviewed broker the following items. They can look at your circumstances against the various lender agreements for zero deposit mortgages and find you the most financially viable and affordable route.
- 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
Is a zero deposit a good idea?Guarantor mortgages are offered on a zero deposit basis by a handful of UK lenders and while this can provide a route to homeownership for eligible borrowers, they do put your guarantor in a risky position because if you become unable to repay your mortgage, they’ll have to instead.
It’s a big decision so you might want to take advice from a mortgage broker who can present you with the alternative options that you might qualify for, while always letting you know the pros and cons of each.
What are the alternatives to a zero deposit mortgage?If you’re unsure about zero deposit mortgages, it can be helpful to know that several alternative routes could help you buy a home with a low deposit.
Help to Buy: Equity LoanAn equity loan helps first-time buyers boost their deposit amount by 20% (40% in London) and that can help them meet the eligibility criteria of a wider range of lenders.
The more choice of lenders, the more choice of rates, which can in turn result in a cheaper mortgage overall.
If you opt for this scheme, you’d need a 5% deposit, with the government providing an equity loan of up to 20% of the value of the property you’re buying.
Need to know:
- The 20% equity loan is interest-free for 5 years.
- After that period, the loan is charged at an interest rate of 1.75%, and then following the sixth year, the interest on the equity loan will increase by the Consumer Price Index (CPI) plus 2% (1% if you took the equity loan before December 2019).
- Help to Buy is only available to first-time buyers
- There are regional price caps with Help to Buy that limit the maximum value of a property that can be purchased under the scheme.
Government-backed 95% mortgagesGovernment-backed 95% mortgages allow eligible applicants to buy homes worth up to £600,000 with just a 5% deposit, helping people to own larger and more valuable property earlier on in their life.
You (the borrower) pay 5% of the market value of the property you want to buy while your lender loans you the other 95% to fund the purchase.
To reduce the risk of loss to the lender, the government provides lenders with the guarantee they need to provide mortgages that cover the other 95%, subject to the usual affordability checks.
Need to know:
- The scheme has been open for new mortgage applications since April 2021 and closes in December 2022.
- A government-backed loan isn’t exclusively open to first-time buyers though; eligible home movers can apply too.
- Unlike the Help to Buy: Equity Loan scheme a 95% government-backed mortgage can be used to buy any property under the value of £600,000.
- That leaves the option of renovating an older property open, which could attract investors looking to make a profit.
First homes programmeThis isn’t a low deposit scheme but the first homes programme (FHP), could allow eligible buyers to purchase a new-build property at a 30% discount with a handful of local councils providing as much as a 50% discount.
Need to know:
- Having a local connection to the area that you want to purchase your home in can help some buyers.
- Some authorities may also choose to give preference to key workers, people who work in the area, and those caring for people in the local area.
- Applicant(s) must earn an annual salary below £80,000 a year (or £90,000 in London) and want to buy a new-build house or flat in the area they grew up, work, or currently live in.
- The minimum discount applied is 30% but local authorities may decide to increase the discount to as much as 50% if the buyer’s circumstances call for it.
- First Homes does not have an application deadline and is open to eligible applicants whenever plots are available with participating developers.
How to apply for a first homes programme mortgage with a low depositIf you want to buy a house under the first homes programme, you’ll need to know where they’re being built, which lenders provide mortgages for them and whether you’re eligible.
Rightmove’s director of property data, Tim Bannister, said the number of properties being planned for the third-off discount scheme was “unlikely” to “satisfy the high levels of demand”.
“There’s likely to be a scramble for properties under this scheme as they become available, especially as we’ve already seen an influx of first-time buyers enter the market recently, helped by more lower-deposit mortgages being available,” he said.
“Based on current available stock levels it’s unlikely there will be enough of these properties to satisfy the high levels of demand, so eligible buyers will need to get in quick to have the best chance of securing one.”
Shared OwnershipShared Ownership (also known as ‘part-buy, part rent’) enables people to buy a share of a property between 10 - 75%, depending on the developer.
Tenants pay a subsidised rent on the remaining share they don’t own with the option to ‘staircase’, which means buy more shares later on. As more shares are purchased, rent goes down.
Most Shared Ownership schemes also charge a service charge too, though the cost of this can vary.
You’ll need a deposit, which is usually a minimum of 5% of the share you’re purchasing, and then you’ll likely need a mortgage to fund the rest of the purchase.
As an example, if you wanted to buy a 50% share in a home valued at £200,000, you would need funds for £100,000. A 5% deposit would cost you £5,000, so you’d need a 95% mortgage of £95,000.
Need to know:
- If you opt for Shared Ownership 2021, you’ll buy a percentage share of the market value of the property and enter into a lease agreement with a landlord.
- Rent on a Shared Ownership home is usually set at around 3% of the unsold equity, however, this can vary depending on the developer.
- Further shares can be purchased later, and tenants may purchase increments of 1% during the first 15 years. Thereafter, tenants can staircase at a minimum of 5% a time.
No deposit mortgage FAQs
What lenders have mortgages with no deposit?Before the financial crash in 2008, some lenders regularly offered 100% mortgages but since then the number of lenders offering this type of high-risk loan has dwindled.
While there are many low deposit options available for first-time buyers and remortgagers, 100% mortgages are rare, even if you have a guarantor willing to use their savings or home as security.
To find these select lenders, ask an expert for their help. A mortgage broker will know which lenders are more likely to offer these deals and under what circumstances. They can advise you on how to prepare for an application but first, they’ll search for the most suitable lender with the best terms and conditions.
They’ll also look at the other costs involved with a mortgage and work to find you an affordable agreement.
Is it better to save a deposit or get a no deposit mortgage?That really does depend on your situation. If you’re able to save a deposit, doing so could help you access cheaper interest rates. A deposit gives you equity right at the beginning of your mortgage too, so if property prices did suddenly fall, your risk of falling into negative equity could be lower.
A zero deposit mortgage could allow you to buy a home without having to save a 5-10% deposit, helping you to get into your own property quicker and potentially buy a home that would otherwise be snapped up before you could save the required amount.
Can I use a credit card to pay for a mortgage deposit?Many lenders will not accept you taking additional debt to fund a mortgage deposit. A very select number of lenders may consider you using a credit card or loan to pay for a small percentage of a deposit if your affordability permits you to repay the loan and mortgage repayment comfortably but even this is very rare.
Can I buy a new build house with no deposit?Most new build mortgage lenders require a 5-10% deposit but that’s not to say it’s impossible as a handful may be willing to consider you for a guarantor mortgage.
This would require a guarantor to use their savings or home as security for your mortgage. If you defaulted on repayments for your new build home, the lender may resort to using your guarantor’s savings to clear the amount owed.
If their home has been used as security for your new build mortgage, the lender could force them to sell their home to recover the debt owed by you.