How do no-deposit mortgages work and should I get one?
No deposit mortgages are back on the market, making it cheaper for first-time buyers to get on the property ladder.
At the time of writing there are currently 16 different residential mortgage options at 100 per cent loan-to-value (LTV), with some requiring a family member or friend to provide security if they fall behind on payments. Of course, there are far more options if you are able to save even a small deposit.
Eligibility criteria varies and lenders are more strict compared with the 2008 financial crises where high LTV home loans were more common.
You will still need to pass tough affordability tests to prove you can afford the repayments.
But these mortgages typically cost more than other products and there are risks to be aware of, particularly if house prices fall.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “First-time buyers are the lifeblood of the mortgage market, but it is an excruciating situation for them to secure a mortgage amid a short supply of affordable housing.
“There will be many reliant on the ‘Bank of Mum and Dad’ to help them get their foot onto the property ladder, such as with a guarantor mortgage. There are even options for borrowers to add their family or friends onto their mortgage to borrow more, but these pose a risk to anyone on the application should the homeowner default on their mortgage.”
Here is what you need to know.
What is a no deposit mortgage?
As the name suggests, a no deposit or 100 per cent LTV mortgage gives borrowers access to a home loan without having to put any money down.
You will still need to go through a mortgage application though to prove that you can afford the monthly repayments and there will also be interest rates stress tests to assess whether you can still repay if interest rates rise.
Mark Eaton, chief operating officer for April Mortgages, said: “A 100 per cent mortgage can be a game-changer for first-time buyers struggling to save while renting.
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“By removing the need for a deposit, it eliminates one of the biggest barriers to homeownership, allowing buyers to step onto the property ladder much sooner.
“This is particularly beneficial for renters whose monthly payments are already comparable to mortgage costs but who find it difficult to save a lump sum alongside their living expenses.”
Who offers no deposit mortgages?
Most 100 per cent LTV mortgages require someone else to provide a security such as savings or committing to make repayments if the borrower defaults.
Skipton Building Society is often hailed as the most innovative.
It launched the Track Record mortgage in 2023 that provides a 100 per cent LTV loan as long as applicants can show they have made rental payments on time over a 12-month period.
The product is only available to first-time buyers over the age of 21 with a good credit history and no guarantor is required.
The maximum that renters can borrow will depend on their credit score, evidence of making their rent on time for the last 12 months and their income but there is a limit of £600,000.
Elliot Culley, director at Switch Mortgage Finance, said: “Affordability for this mortgage is calculated in two ways – the borrower’s income but also the interest rate and rent the borrower has been paying as a tenant.
“I have found the rental payments and current higher interest rates for this product can hamper the amount the borrower can lend which means a smaller property than the borrower is sometimes currently renting. So the product has some limitations currently whilst rates are higher, if rates continue to fall it’s likely this product would become more popular as the borrowing capacity should also increase.”
Other options include Barclays Bank’s Mortgage Boost, where first-time buyers and existing homeowners can add another individual to an application to increase the amount they can borrow.
Anyone on the application is legally responsible for the mortgage but the helper won’t own the property or be named on the title deeds.
Barclays Bank also offers a guarantor ‘Family Springboard Mortgage’ whereby helpers can deposit a lump sum – 10 percent of the amount borrowed – for five years to help a first-time buyer to secure a mortgage.
The money is returned to the depositor with interest.
Lloyds Bank has a Lend a Hand Mortgage that lets a guarantor deposit 10 per cent of the amount borrowed for three years into a fixed term savings account to help a borrower secure a mortgage, which is returned to the depositor with interest.
However, this has a limited distribution.
Similarly, Halifax has a Family Boost Mortgage that works the same way but the borrower or helper must have a Reward or Ultimate Reward Current Account with the bank.
What are the risks of a zero deposit mortgage?
A 100 per cent LTV mortgage may remove one the largest pitfalls of buying a home – the deposit – but there are downsides.
The rates are typically higher than if you can even put down a 5 per cent deposit. For example, Skipton’s Track Record mortgage has a rate of 5.44 per cent for five years.
But if you can pull together a 5 per cent deposit, Lloyds Bank has a five-year fix at 4.96 per cent.
A 25-year £200,000 mortgage would cost £1,221 per month with Skipton in this scenario but would be £1,164 with Lloyds Bank. That is £57 cheaper per month, £684 over the year and would save you £3,420 over the full five years.
Steve Humphrey, founder of The Mortgage Pod, said: “My advice is often to wait until they have a five per cent or higher deposit, as this would open up substantially more options and lenders.”
Another risk is that if house prices fall, you could end up in negative equity – which is when the value of your house is lower than that of your mortgage.
This could make it hard to remortgage or sell as you would need spare cash to make up any shortfall between your property value and the amount of loan left.
Springall added: “House prices can rise in the years ahead, but they can also plummet. The latter could be a disaster for borrowers with little equity in their homes from borrowing at the highest ends of the loan-to-value spectrum.”
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