Getting on the property ladder is the dream for most people but soaring house prices combined with a cost-of-living crisis have made this a lot harder than it used to be.
First-time buyers need a deposit of around 20% of the property price, on average, which could be £50,000 on a property worth £250,000. This can take a long time to save towards, and be impossible for some, yet there are other options.
One of these is a mortgage without a deposit, and while these aren’t common, they could be an idea if you don’t have a deposit saved.
A zero-deposit mortgage is an option if you want to get on the property ladder but you don’t have enough money saved for a deposit. They allow you to get a mortgage, and buy a house, without a saved deposit.
But there are risks involved with these deals, also known as 100% mortgages or 100% LTV (loan to value) mortgages.
That’s why it’s important to fully understand how these mortgages work before taking one out. As you’re not paying a deposit, this also means the mortgage provider will own all of the property at the start.
In this guide I’ll discuss everything you need to know about 100% mortgages including the pros and cons, how they work, and some of the options available, to help you decide if they might be an option for you.
What is a no deposit mortgage?
A no deposit mortgage does what it says on the tin — you get a mortgage to buy a property and you don’t need to pay a deposit. This means the mortgage provider will lend you 100% of the property price so you can get on the property ladder without paying a deposit.
There aren’t many 100% mortgages around but they do exist, and can be a good option in some circumstances.
What deposit is usually required to get a mortgage?
You will usually need to pay a deposit of at least 5% of the property price to get a mortgage. If a property is worth £200,000, this would require a deposit of £10,000, for example. This is known as a 95% LTV mortgage.
However, the amount of money you can borrow and the deposit required will also depend on your financial circumstances and your credit score.
House prices have risen significantly in the last decade and as of January 2024, the average house price in the UK was £281,913, according to the Land Registry.
How do 100% mortgages work?
A 0% mortgage means you can borrow the money to buy a house but you don’t pay a deposit. This can save you a lot of money initially, as you aren’t paying the deposit, but it can cost more overall in higher monthly repayments to your mortgage provider.
There are also other costs to include when buying a house which you’ll need to pay for including legal fees, stamp duty, valuation and survey costs, and the money needed for moving house.
Can I get a mortgage without a deposit?
Yes, you can get a 100% mortgage, but they work slightly differently to traditional mortgages which require a deposit.
There are also not many 100% mortgages on the market and if you take one out you may need to have a guarantor or a family member named on the mortgage document. They are then responsible for paying the mortgage if something happens and you are not able to.
What are the best 100% mortgages?
There is currently only one 100% mortgage available, which doesn’t require a guarantor of some sort.
Here I’ll explain how it works and look at the other options available.
Skipton Track Record Mortgage
It is from Skipton Building Society and was launched last year, it’s called the Track Record Mortgage and it’s a five-year fixed-rate mortgage. It’s available with a deposit of up to 5% but you must meet certain conditions to be approved and the lender will look at your credit score when deciding whether to lend to you or not.
They include the following:
- You can’t buy a new-build flat.
- You must be able to show a record of paying your rent for at least 12 months in a row.
- You will need to show a record of paying all of your household bills for at least the last 12 months in a row.
- The person (or people) applying for the mortgage need to be the same people who have rented their current property for the last year.
Guarantor mortgages
A guarantor mortgage lets you put another person, such as a family member or friend, on your mortgage agreement.
The guarantor may put money down as a safety deposit or they can put an asset they own, usually their home, down as collateral.
If they put savings down, usually around 20% of the property value is required. This money is then kept by the mortgage provider until you have paid it off, or after a certain time period has passed. With these mortgages, the guarantor can usually earn interest on the money they put forward, although this is typically lower than they could get from a standard savings account.
However, if you miss a repayment on your mortgage, or you’re unable to pay it, the guarantor’s money may be kept for a longer period by the mortgage provider. If the house is repossessed because payments aren’t made, and the provider gets paid less than the money due on the mortgage, they may also take some money from the guarantor’s savings.
Guarantors can also put their homes up as collateral but this can only be done if they either own their house outright, or they own a significant percentage of it. However, there are risks involved with these mortgages and huge potential consequences. If you miss repayments on your mortgage, for example, or if the house is repossessed, the lender could seize the guarantor’s house.
What are the risks of a 100% mortgage?
There are risks with taking out a mortgage with no deposit, and you need to fully understand these before taking out one of these products.
They include:
- You won’t be able to get the best mortgage deals with a 0% deposit.
- If you owe more than a property is worth you could be in negative equity.
- Interest rates will be higher if you’re not paying a deposit (or even if you’re paying a small deposit).
- A guarantor could risk their own home being repossessed or their savings being taken by a mortgage provider. They’re also likely to get less interest if putting up their savings for the mortgage.
The pros and cons of a 100% mortgage
Here I’ve briefly looked at the pros and cons of getting a mortgage with no deposit:
Pros:
✔️ You can get a property without paying a deposit.
✔️ It’s often cheaper to pay a mortgage when compared to renting.
✔️ You can get on the property ladder sooner.
Cons:
❌️ You’ll pay higher interest rates than with a standard mortgage.
❌️ Your mortgage repayments will be higher than someone paying a larger deposit, because you owe more money to your provider if you haven’t paid a deposit.
❌️ There’s a risk your guarantor will lose their savings, or their home, in the worst-case scenario.
❌️ There is a risk of falling into negative equity, where you owe your provider more money than the value of your property.
What are the alternatives to a 100% mortgage?
There are a number of different schemes available if you’re trying to buy a house but you aren’t able to save up a deposit.
They include the following:
- Shared Ownership: If you buy a house via a shared ownership scheme, you can buy a percentage of a property, between 25% and 75%. You then pay both mortgage payments on the part of the property you own, and rental payments on the remainder to the property developer. You can then increase your share in the property over time.
- First-time buyer mortgage: Mortgages specifically for first-time buyers often only require a 5% deposit which can help you to get onto the property ladder sooner. However, interest rates are likely to be higher than a mortgage with a bigger deposit.
- New build loan: Some new build property developers offer loans to cover the cost of a deposit, which then needs to be paid back over a set time along with your mortgage repayments.
Can you buy a house with no deposit and bad credit?
If you have a bad credit score, your options will be limited. That’s because when you apply for a mortgage, a lender will look at your credit score to see how likely you are to repay them on time.
However, it isn’t impossible to get a mortgage with bad credit — but you may be offered a higher interest rate. If you’re struggling to find a mortgage, a broker can help you and show you the options available.
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