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Mortgage Without Deposit
Prior to the 2008 financial crisis, 100% loan to value mortgages were widely offered meaning a borrower could get a mortgage for the full value of the property without the need to provide a deposit. Since then, with laws and legislation changes and lenders criteria’s and requirements tightening, no deposit mortgages are much more rare but not entirely impossible.
How do mortgage deposits work?
Deposits are a cash sum that you put towards the cost of purchasing a property and the rest is made up of a mortgage loan from a lender. You may have heard of the term loan to value (LTV) ratio and this is calculated as a percentage of your mortgage loan in comparison to the property value.
Property value = £200,000
Deposit = £10,000
Mortgage loan = £190,000
£190k of £200k makes a loan to value = 95%
If you are looking to purchase a home, generally speaking lenders require a minimum of 5% deposit but the larger the deposit the better. Having a bigger deposit will open up your access to more mortgage deals and better interest rates which could reduce your monthly mortgage payments.
Throughout your mortgage term, if you have a capital repayment mortgage, you make monthly payments to the lender which consists of interest payments and payment to reduce your loan amount. Should you wish to sell your property and it hasn’t been paid off in full to the lender, a proportion of the sale will be returned to the lender to pay off the remaining debt owed to them and you receive the rest.
How to get a mortgage without a deposit
The products that are available to a borrower with no deposit will require a guarantor. A guarantor is usually a parent or a close family member take some of the risk of a mortgage loan by acting as a guarantor and putting up assets as a security for a loan. The collateral they usually have to put up is their own property or savings.
Property as security:
This requires a percentage of the guarantor’s own home to be secured against the borrower’s mortgage loan as collateral. This is a huge commitment for a guarantor and careful consideration needs to be taken because if the borrower defaults on mortgage payments, it could result in the guarantor’s house being repossessed to pay for any shortfalls.
Savings as security:
A guarantor will be required to put a certain amount of money into a savings account held by the lender for a period of time as stated by the lender. Withdrawals are prohibited until a certain percentage of the mortgage loan is paid off. Again the guarantor could risk losing their savings if the borrower does not keep up with mortgage payments.
• Allows you to buy a property with no deposit.
• Can allow you to get on the property ladder sooner.
• Requires a close relative to act as guarantor.
• Mortgages with lower deposits or no deposits could come with higher costs such as application fees, interest rates or lending charges.
• It may take longer to pay off if you are borrowing more from the lender and monthly payments may be higher.
• If property value decreased, you could end up with negative equity in your property which means you would owe the lender more than the value of your property.
Besides having a guarantor, lenders will need to assess your application for other factors which helps them determine their decision. They will need to ensure you have a steady income to be able to fund the mortgage repayments and your outgoings to check your affordability. They will also check your credit score and credit history to see how risky of an applicant you are. It is good practice to check your credit score often to help you understand your position and ensure there are no inaccuracies.
What if you don’t have a guarantor
It isn’t worth trying for a mortgage if you are not eligible. Mortgage lenders carry out credit searches as part of their assessment process which can leave a ‘hard search’ on your credit report which will show the mortgage lender requested your credit report but not the results. Hard searches can lower your credit score so if your mortgage application is rejected then other lenders be wary.
There are other schemes available to help with getting on the property ladder:
Shared ownership: Shared Ownership allows someone to part-buy, part-rent a home from housing association and the share you can initially purchase is usually between 25% – 75% of the property price. You provide a deposit (typically between 5% – 10%) and take out a mortgage for your share of the property. For the remainder share of the property you pay rent to the housing association until you have purchased 100% share of the property. This means the deposit you are required to have is lower as you only need a percentage of your share of the property rather than the full value of the property.
Help to buy equity loan: You will be required to save for a deposit of at least 5% whilst borrowing up to 20% of the cost of a new built home (up to 40% in London boroughs) from the government to add to your deposit. The share the government has loaned you will need to be paid back when you come to sell the property or at the end of term and how much you pay back depends on the properties current market value, not the original purchase amount. Having a higher deposit can increase your chances of being accepted for a mortgage.
Trying to buy a property with no deposit can be more difficult but saving for a deposit can also be challenging. Each lender’s requirements for a mortgage applicant can vary so by consulting with a professional advisor, it could help save you time and provide you with options that are available for you and your situation and circumstances.