Affordability can be a huge barrier to getting onto the housing ladder.
If you are struggling to save up the 5% deposit that most lenders ask for, then perhaps a no deposit mortgage could be an option.
You won’t need a cash deposit yourself, but you will need help from a family member. Read on to learn how they work and where to get one.
What is a no deposit mortgage?
A no deposit mortgage is used when you want to borrow all of the property purchase price, without putting down a traditional cash deposit.
They are often referred to as 100% mortgages or deposit free mortgages.
Most lenders like to have a minimum 5% deposit, along with a 95% mortgage.
The usual cash deposit is not needed for a no deposit mortgage.
However, the lender will need something else to enable them to provide you with a 100% mortgage.
This can be a cash sum from parents or perhaps extra security from a guarantor.
Why lenders ask for a deposit
Being a mortgage lender is all about managing risk: The risk of someone not keeping up with their monthly payments.
If you ask them for a 100% mortgage to buy a house, you are not putting any of your own money in. You have no capital at risk. Whereas the lender has hundreds of thousands of pounds on the line.
So a deposit is a financial commitment from the borrower, that reduces the risk of lending them money.
Now a 5% deposit still leaves the lender responsible for the other 95%. But in money terms, 5% will be many thousands of pounds. It’s your stake in the property.
The amount of cash deposit required by the lender is their financial buffer, against falling property prices, and a borrower who can’t afford the repayments.
You may find this useful: Guide To Deposits
Negative equity
Home equity is the difference between your mortgage debt and how much your home is worth.
Negative equity occurs when the debt is more than your house is worth. The most common cause of this is a fall in property prices.
So if you start with a 100% mortgage, your equity position is nil. It only needs the smallest downward change in property prices to push you into negative equity.
Can you get a mortgage without having a deposit?
There was a time when true 100% mortgages were commonplace.
Borrowers were able to borrow the full purchase price and there was no need for any cash deposit. The problem here is negative equity. When property prices fall you then owe more than the house is worth.
(And btw you can’t move house or remortgage).
Buying a house without having a cash deposit is possible but you will need the help of your family.
Broadly there’s three options:
Family cash
Your family put a cash sum into a bank account with the mortgage lender.
This represents your ‘deposit’ and the lender provides the rest via a mortgage.
Your family’s cash will be tied up, usually for 3-5 years. Some schemes will pay interest on this money, others use it to ‘offset‘ the mortgage interest.
Family equity
Your family will allow the lender to place a legal charge against their home.
This could be a first charge or a second charge, depending if they already have a mortgage.
This gives the lender added security, which could involve selling the family home. The charge is normally removed after 3-5 years.
Family property
Your family sells you a property (eg. buy to let) at a discounted price, which is less than the open market value.
You can use a concessionary purchase mortgage to fund 100% of the purchase price. The LTV is based on the valuation, which can mean that no additional cash deposit is required.
How would a no deposit mortgage work?
There are a few ways of achieving a 100% mortgage situation if you don’t have the required deposit.
A lender won’t just give you all the money you need, it is too risky. So you need a family member to step in and give you some financial help.
We would recommend speaking to a mortgage broker at the earliest opportunity, so you can discuss the different methods and choose one you all agree on.
For the actual mortgage part of the arrangement you will still be able to pick from different interest rate options, although most lenders will want you to have a capital and interest repayment method.
The solutions available will depend on whether you get help in the form of family cash, or family security.
Family cash
The amount of cash needed will depend on the lender, but we’ll work on 10% as an example.
So if you were buying a home for £400,000, a 10% deposit would be £40,000.
Your family (usually parents or grandparents), would need to give the mortgage lender £40,000 as a 10% ‘deposit’. This money will be kept in a separate bank account that is linked to the mortgage.
The mortgage is then effectively 90% LTV.
The £40,000 can be put to use in one of two ways, again depending on the lender:
1 – Held as a deposit: The money is placed in an interest bearing savings account for a fixed number of years, usually 3-5 years. This is a family deposit mortgage.
2 – Used to offset interest: With this option the donor does not receive any interest. Instead, the sum is used to ‘offset’ or reduce the amount of interest you would pay each month. Again, the cash is held for a fixed term. This is a family offset mortgage.
Family security
This option would only be available to family members who are homeowners and have enough home equity.
There’s no need for any cash to be used.
The mortgage lender would include the family member as a guarantor on the mortgage and would take a legal charge against their home.
If the worst happens the lender can use your home and the family members home to repay the debts.
This gives the lender the security they need to fund 100% of the purchase price.
You will find more useful information in our Guide to Guarantor Mortgages
Don’t forget the other costs!
While not having to come up with a deposit is a godsend, buying a house is still expensive.
You need to budget for many other costs including; stamp duty, legal fees, mortgage fees, removal costs etc.
You will find more useful information in our Guide to Mortgage Fees
Eligibility
To be eligible you’ll have to meet the lender’s criteria.
Eligibility rules apply to all mortgages, whether you have a low deposit or no deposit.
Where you are using the guarantor option, they also need to meet these eligibility requirements.
Credit status
All borrowers will be credit checked by the lender. Some lenders are OK with a less than perfect credit file, while others need it to be squeaky clean. It’s a good idea to check your credit report before you apply.
How to apply
If you feel that a no deposit mortgage is a good option for you then first speak to an independent mortgage broker.
It is never too early to do this.
Brokers are more than happy to give you some initial advice and guidance, before you have even found a property. They can show you the different mortgage interest rates, what the mortgage fees would be and how much you need to pay each month.
You then have the knowledge to decide what mortgage option would suit your family the best.
These situations are more complex than a standard mortgage, so we would always suggest using a broker.
Once you have found a property the broker will help you with the paperwork and other documentation needed.
You will find more useful information in our article: How to get mortgage ready
How a broker can help
By using a whole of market mortgage broker, you automatically gain access to over 100 lenders.
These are qualified advisers who work with mortgages all day, everyday.
They will be familiar with the lenders that offer no deposit schemes and any relevant government schemes (like the mortgage guarantee scheme) that could help you.
It’s their job to sort through thousands of deals to find the best one for you.
Respect Mortgages works with an award winning whole of market mortgage broker. They have qualified advisers all over the UK, so expert help is available wherever you live.
Get in touch
Simply call us on 0330 030 5050 and we will match you to a mortgage expert.
