If you have not been able to save up a deposit, but would still like to obtain a mortgage to buy a property, there are options out there for you. It can be hard to get a foot on the property ladder and the most common challenge is being able to put together a significant sum of cash to put down as a deposit. We get lots of people coming to us with questions about how to get a mortgage without a deposit and we’re happy to tell them that it is possible.
In fact, no deposit mortgages are more common than you might think. In the modern mortgage market, there is a wealth of options to explore that offer a helping hand to buyers. If saving for a deposit has been a struggle, keep reading to learn how you could get the mortgage you need without one.
How do no deposit mortgages work?
Before we get into it, let us clarify that ‘no deposit’ does not entail that you could receive a 100% mortgage. There is no mortgage product, in the traditional sense, in which the lender will provide 100% of the capital to purchase a property without any kind of security. Instead, you must use another option that allows you to get a mortgage without paying a deposit in cash.
A deposit is calculated as a percentage of the overall value of the property, which you pay for with money you have saved up or received as a gift. The mortgage will cover the remaining percentage of the purchase price. So, if you bought a home for £200,000 with a 15% deposit, your contribution would be £30,000. The remaining £170,000 would be covered by the mortgage. The loan to value (LTV) ratio in this instance would be 85% as this is the percentage of the purchase that the mortgage covers.
To get expert advice on what mortgage would be a good fit for you, enquire today with Think Plutus and a specialist adviser will be able to talk you through your options.
Is there such a thing as a 100% LTV mortgage?
Given the information above, you would think that a 0% deposit mortgage would have an LTV of 100%, meaning the mortgage would cover the full purchase price of the home. In today’s market, there are no lenders who will offer a mortgage without any kind of security to offset the risk. Lenders’ assessments are always based on risk and covering the full cost of a purchase would simply put them in too weak a position.
Fortunately, there are options available that can provide that security using alternative means. Let’s take a look at some of the options that might be a good fit for you.
Why would a no deposit mortgage be such a risk?
The smaller the deposit you contribute, the more expensive it is to obtain a mortgage. A low deposit is regarded by lenders as a riskier investment, so your options will be limited. This will mean that the most competitive mortgage rates are out of your reach and the lending charges and application fees will be higher.
Additionally, there would be a risk of falling into negative equity. This means that in addition to owing the full capital balance to the lender, you also owe the interest and other associated costs. If the value of your property were to go down, its value would be less than the amount you owe to the lender. In this situation, even if you were to sell the property, you would not be able to pay off your mortgage in full.
This is why no lender in the UK will authorise a 100% LTV mortgage. Instead, there are different schemes and methods of buying a property if you don’t have the money for a deposit. These methods provide security for lenders without you having to save that large lump sum.
Are no deposit mortgages available in Scotland?
You may be aware that the rules around buying property are not entirely the same in Scotland as they are in England. Nevertheless, there are no significant differences in lending practices for buyers North of the border. ‘No deposit’ mortgage options are available in Scotland just as they are elsewhere in the UK.
Having said that, there are still no 100% LTV mortgages in Scotland, so a different form of security will need to be provided in lieu of a cash deposit.
What are the options for no deposit mortgages?
Obtaining a personal loan for the mortgage deposit
The practice of taking out a loan in order to qualify for an even larger one is not regarded positively by lenders. Many will not consider you at all if you try this. The reason is that it has a negative impact on your affordability if you are going to be paying off two loans at once. It also shows that you have not made the effort to personally save money for the purchase, which suggests that you are a high-risk candidate.
There are, however, a handful of lenders that will consider you under the right circumstances. If you can demonstrate that you have the means to comfortably afford the mortgage repayments in addition to other debts, bills and outgoings, there may be some hope. The same can’t be said if it is apparent that you can’t afford a mortgage when your outgoings are assessed. Lenders will also need to see a clear credit file before confirming anything.
You may be able to make this arrangement work with a loan that provides a deposit of 5%, 10% or even 15%. Keep in mind that larger personal loans are quite uncommon as the cap on this type of borrowing is £25,000. Furthermore, the maximum term is usually 7 years, so repayments would be higher than if they were over a full mortgage term.
A guarantor mortgage can be a great way to get on the property ladder if a family member or close friend has the means (and the will) to help out. In this case, your mortgage would be secured against your guarantor’s savings or a property they have equity in.
Some lenders will offer a 100% mortgage if there is someone willing to stand as a guarantor for you. This is achieved by securing the loan against the equity they hold in a property or by moving savings equal to the necessary deposit amount into a special savings account managed by the mortgage lender.
Can a guarantor’s savings account be used as the deposit for a 100% mortgage?
It’s possible. The lender will require your guarantor to temporarily place the money in a savings account they hold. They will be unable to access these funds until a predetermined amount of time has passed, or until enough of the mortgage has been paid off.
Think Plutus has created a detailed guide to guarantor mortgages on our website.
Using credit cards
In most cases, credit cards will not be accepted as a way of paying a mortgage deposit. However, there are some lenders willing to consider the option of using a credit card to top-up a deposit if you are short of the amount they require, as long as the card balance meets affordability checks.
It is extremely rare to see a borrower permit a credit card to fund a deposit for their own home. However, some people have used the method of increasing their credit card spending in order to help save more disposable income to build up a cash deposit.
This means that the deposit is accumulated in cash savings while the debt accumulates on the credit card, rather than spending those savings. If the balance remains manageable and meets affordability checks at the point of application, the cash savings could be enough to use as a deposit for a mortgage.
Again, if you take this approach, it’s unlikely you’ll have access to the best rates. You may also find that the amount you can borrow is limited.
A gifted deposit involves someone close to you, like a family member or friend, giving you a gift of a sum of money to go towards a mortgage deposit. This contribution has to be a gift rather than a loan – lenders will require a signed document that confirms the donor’s name, their relationship to the buyer, the value of the gift, and a confirmation that there is no obligation for the recipient of the gift to repay.
The most common type of gifted deposits accepted by lenders are those from family members, particularly when you are not putting forward any capital yourself. There are, however, several other gift providers that may be accepted:
Vendor gifted deposits
This comes in the form of equity, whereby the vendor offers the property at a discounted price. For example, a house could be on the market for £300,000 but the vendor offers to sell for £270,000 (a discount of 10%) to sell quickly. That 10% discount may then be applicable as 10% of the buyer’s deposit.
Developer gifted deposits
Developer deposits are another form of equity gift similar to a vendor gift except that the ‘gift’ is offered to the buyer by a builder or developer. This is restricted to new builds.
It’s unlikely a developer discount would ever be greater than 10% and, since new builds are often perceived as higher risk, most lenders will insist on a 15%-20% deposit. If you’re looking for a low-cost mortgage with no deposit, a developer gift probably won’t be your best option.
Landlord gifted deposits
Again, a landlord gift comes in the form of equity. In this case, the buyer purchases the property from the landlord at a discounted price and that discount makes up the deposit for the purposes of the mortgage.
Family gifted deposits
Many parents contribute a portion of a deposit, or the full amount, to help their children get on the property ladder. It’s a good option if the buyer is having difficulty saving a lump sum for a deposit, but there must be real confidence that they can keep up with mortgage repayments.
Direct family such as parents, grandparents and siblings are common sources of gifted deposits that lenders are usually happy to accept. With more distant family, such as aunties, uncles and cousins, the rules may be stricter.
If you are fortunate enough to have a family member that can gift you a deposit, this is one of the best ways to get on the property ladder without paying a deposit yourself. A clean credit history will be important, and you should know that lenders will look upon you more favourably if you are able to make your own contribution in addition to the gift.
Lenders tend to regard vendor, developer and landlord gifted deposits far more cautiously. This means fewer lenders are willing to accept them, particularly if you are not contributing anything towards the deposit yourself. One reservation the lender may have is that they will want to ensure that the true market value of the property matches the original asking price before the discount was applied. Furthermore, in virtually every case, lenders will want the buyer to match the gifted deposit, or at least make some contribution, to demonstrate their commitment to the investment.
If this idea sounds appealing in theory, but you feel uncomfortable accepting such a large gift from your family, a family springboard mortgage might be a good option for you. In this arrangement, your close family member doesn’t actually pay the deposit, but instead placed an agreed sum of money into an account held by the mortgage lender. After three years, that money is returned with interest, as long as you’ve kept up with the mortgage payments.
Government schemes to help you raise a deposit
If your situation meets certain criteria, you could be eligible to receive assistance from the government. For people in search of a no deposit mortgage, you could explore a couple of flexible schemes that are designed to help people in your situation. Aimed primarily at first-time buyers, they are a good thing to know about.
What no deposit mortgages are best for first-time buyers?
Let’s take a look at the schemes that exist to help first-time buyers obtain a mortgage with little or no deposit. These initiatives are not exclusively provided for first-time buyers, but they are the main target.
100% shared ownership mortgages
Shared ownership mortgages are a component of a government scheme that has gained a lot of popularity. The idea is to help lower-income households (those with a combined income of less than £60,000 per year) and first-time buyers get a mortgage.
Under the scheme, you take out a mortgage for the share you wish to own in the property – usually somewhere between 25% and 75%. Meanwhile, you pay a reduced rent on the remaining portion. In this arrangement, the mortgage you require will be much smaller, meaning you won’t need to save up such a large deposit.
So, for example, with a property valued at £200,000 requiring a 10% deposit, you would need £20,000 to take out a mortgage and buy 100% of the property. To own 75%, the deposit would be £15,000, to own 50%, it would be £10,000, and to own 25% your would need a deposit of just £5,000.
You can pay for your share of the home in cash or you can take out a mortgage. Most mortgage lenders will need you to provide a deposit of at least 5%-10% but there are some lenders out there that will offer a 100% mortgage on a shared ownership property. This means you could own a share of a home without having to raise any deposit at all.
Shared ownership rules in Scotland
Scotland has various initiatives for prospective homeowners to receive help from the government. This includes a shared ownership scheme that functions in a similar way to the system described above. Priority is given to people living in council houses or housing association properties. We recommend that you do some research into the Scottish regulations for buying homes North of the border. You can get more detailed information from the Money Advice Service about how shared ownership works in Scotland. Alternatively, get in touch with Think Plutus and we can give you some answers about the Scottish housing market.
100% Right-to-Buy mortgages
The Right-to-Buy scheme exists to help eligible residents of council and housing association homes in England to purchase their home at a reduced price. The price you pay depends on the type of property you live in, the length of time you’ve lived there and its current market value.
The minimum length of time you will need to have lived in your home is three years, and the discount increases with time up to a maximum of 70% of the property’s value. The discount is capped at £77,900 (£103,900 for properties in London).
When you purchase your home through Right-to-Buy, the process is very similar to any other property purchase. If you can’t afford to buy the property outright, you will need to apply for a mortgage. Many lenders are willing to let you use your Right-to-Buy discount as your deposit, meaning a mortgage may be obtained without having to use your savings to put down a deposit yourself.
For example, if your home is valued at £200,000 and the maximum discount is applied to 70% of that, the purchase price will be £140,000. For a mortgage lender that accepts this as a deposit, that discount has essentially provided a deposit of 30%, so they will grant a 100% (nil deposit) mortgage on the remaining £140,000.
Borrowing over 100% on Right-to-Buy mortgages
In some cases, you may even find a lender that is willing to loan an extra 10% to assist with other costs that are associated with the property purchase. In the case of the example above, you could get the full £140,000 nil deposit mortgage with an extra £14,000 on top. Be advised, however, that this is quite a rare occurrence, and you may be able to access more favourable rates if you contribute something towards the deposit from your own pocket.
Help to Buy (Until October 2022)
The Help to Buy scheme, whilst not completely deposit-free, can make it easier to access a better mortgage rate with a deposit as little as 5%. The scheme offers an equity loan whereby you borrow money for an interest-free deposit for up to 5 years covering up to 20% of the property’s value (40% in London).
Essentially, you put down the 5% deposit you have saved and take out a mortgage for the rest of the purchase price. With the combined deposit totalling a potential 25%, the more attractive mortgage rates will be available to you.
The equity loan can be repaid at any time without being penalised with early repayment charges. You can repay either 10% or 20% of the total amount, as long as the loan is worth at least 10% of your home’s value. If you don’t pay the loan back whilst still residing at the property, the government will reclaim its 20% stake at the property’s value upon selling – something that’s worth keeping in mind.
Help to Buy is a scheme that both first-time buyers and home movers can take advantage of, with no maximum income requirement stipulated. However, it can only be applied to new builds and the value of the property cannot exceed £600,000. The buyer may not own any additional properties and it cannot be purchased as a buy-to-let. As always, you will need to demonstrate that you can meet the mortgage lender’s criteria to qualify.
Help to Buy is Ending, Applicants can still apply for a Help to Buy loan until 31st October 2022, but the five-month deadline may be unrealistic for first-time buyers hoping to purchase their first property.
Read more here: The End of Help to Buy (& What Comes Next!)
Is there such a thing as a 100% Help to Buy mortgage?
At the time of writing, there is no mortgage option like this. However, if you are borrowing your 5% Help to Buy deposit with a personal loan, there are options out there for you.
Personal circumstances that affect eligibility for deposit-free mortgages
As with all mortgage types, there are various factors that can either help or hinder with your chances of obtaining a mortgage with no deposit.
Securing a mortgage without being able to put down some of your own cash for a deposit is challenging, so if you have other factors that work against you in the equation, it becomes even more of a challenge. The most common of these things include:
With most lenders, a self-employed borrower will need to have at least a year’s worth of accounts to be able to approach a limited number of lenders. If you have accounts dating back more than 3 years, and they show that you can comfortably afford repayments alongside your other outgoings, lenders will regard you more favourably and you should have more options available.
As with most cases of bad credit, the unique circumstances of your situation will be key, but bad credit can be a problem when attempting to secure a mortgage with no deposit. The credit issues that can cause problems for borrowers include:
- Adverse credit history
- Poor credit score
- Mortgage payment arrears
- Individual Voluntary Arrangements (IVAs)
- County Court Judgements (CCJs)
- Debt Management Plan (DMPs)
Ultimately, your chances of securing a mortgage with adverse credit depend on the severity of the issues on your file. A low credit score or late payments are considered less severe than bankruptcy, for example. The length of time that has passed since they were registered is also important – more recent issues will make it harder to get approved than if the issues were many years ago.
Loan as a deposit
There are not many lenders who will consider a loan for a deposit, particularly if your credit file is not completely clean. If you have both these issues to contend with, there would only be a handful of lenders willing to consider your application, let alone approve the mortgage. Having said that, it isn’t completely impossible.
You will need to approach a specialist lender and have to contribute a higher deposit than usual – probably at least 25%. If you can meet affordability checks with a personal loan this size, or a combination of your own cash and a loan, you may still have some options available to you, even if you have adverse credit.
Some of the lenders providing Right-to-Buy mortgages will permit borrowers with adverse credit, once again depending on the nature and the date of the issues. Some will require a minimum deposit of 5% while others will still be willing to lend 100% of the purchase price.
No deposit mortgages for non-standard construction types
A non-standard construction property is generally seen as a more high-risk investment. Consequently, there are fewer lenders willing to consider these types of applications and less competitive rates available.
Lenders who are willing to consider this type of application will often require a significantly larger deposit for non-standard bills. If you are unable to contribute anything to the deposit from your own pocket, the likelihood of you being accepted is very low. This is because your commitment to an already risky investment has not been proved.
For a buyer looking to invest in property with a buy-to-let mortgage, most lenders will require a minimum deposit of 25%. There are some who will accept 20% and a handful willing to consider just 15%. If you are able to raise the deposit through other means, such as a gift, but pay nothing from your own savings, lenders will want to know why. This doesn’t mean it will be impossible, but it may lower your chances of success.
The only realistic way of purchasing a buy-to-let without putting forward a deposit would be to take out a personal loan to finance it. Even so, the number of lenders willing to consider this case would be extremely limited. Otherwise, you would need to raise capital against another property, which would not be possible if you don’t already own other assets.
Please note that people who are looking to buy a second home are not eligible for government schemes like Help to Buy.
Still have questions? The advisers at Think Plutus have expert knowledge on no deposit mortgages…
If you would like tailored, detailed no deposit mortgage advice, get in touch with Think Plutus today. We will gather some details about your situation and talk you through your options in a no-obligation, free initial consultation. As whole-of-market mortgage advisers, we are ideally positioned to find you the best options for obtaining a no deposit mortgage. Our friendly team is waiting to hear from you so please feel free to get in touch or drop us a line and get the ball rolling.
For no-nonsense advice on getting a mortgage with no deposit, Think Plutus.