Buying a house with no deposit

Buying a house with no deposit may seem impossible, but with the right knowledge and guidance, you can secure a zero-deposit mortgage and get on the property ladder.

When you buy a home, you will almost certainly have to consider the possibility of taking out a mortgage loan for the substantial part of the purchase.

And when you take that step, you'll be aware that most lenders will require a deposit, which is usually set at 5% (sometimes more), that you must put towards the cost of buying your home.

Unfortunately, for many people, finding the money with which to establish the required deposit is difficult.

For example, if you are renting, the amount of money that you're paying each month might not put you in the best position to establish a pot of money to save towards any deposit.

So, then, the idea of taking out a zero-deposit mortgage seems like a great opportunity to purchase your next home without struggling to save up beforehand.

Here we look at the zero-deposit in more depth to guide you through the considerations that you should factor into any decision you make regarding your chosen mortgage route.

As the name suggests, the zero-deposit mortgage is just that: a loan from a mortgage lender that does not require you to come up with the money for a deposit.

It is also known variously as a no-deposit mortgage or 100% loan-to-value (LTV) mortgage. These are all style choices for the product that a mortgage lender is selling, but amount to the same thing: if you meet the stringent criteria, you will not have to find the funds the deposit.

The idea of not having to save for a deposit, or borrowing from a family member or friend to get to the magic figure stipulated by a mortgage lender seems like a perfect solution to funding your property purchase.

However, you should be aware that providing such a mortgage is a significantly greater risk for the lender, which means that, to mitigate against this, there will be increased controls and more stringent criteria that you will have to meet before they will be willing to lend the 100% price tag to you.

With the financial crisis in 2008, which was caused in part by unsecured loans to risky propositions, 100% mortgages are more difficult to find.

In the wake of that “credit crunch”, this type of loan has almost disappeared; however, the product can be made available on the provisos laid out by the Financial Conduct Authority that ensures any affordability criteria are fully met.

This prevents banks and building societies falling into the same trap.

From that standpoint, the process for getting hold of a zero-deposit mortgage is the same as for a traditional path to a loan: you apply to the lender and after you have stated your financial status.

With particular reference to how you are planning to repay the loan each month without defaulting, they will assess the risk to them before agreeing or denying you access to the loan.

If you are in the market for a no-deposit mortgage, you can try looking at one of the comparison websites to see what's available.

It's also worthwhile talking a to a mortgage broker, who will have all the latest mortgage products details to hand and can help you tailor your requirements and the mortgage product that best fits.

There are two situations that will help you with obtaining a no-deposit mortgage that are worth looking into:

Guarantor mortgage

Because the lender is in the business of lending money but protecting their investment in you and verifying it is not subject to unacceptable risk, they are only interested in ensuring that you can stump up the money for the monthly repayments without defaulting.

With a guarantor mortgage, where someone guarantees to repay any shortfalls that you might create, this provides them with the assurance that, in the event that you cannot afford to pay back a repayment (remember that the repayments will almost certainly be larger than for a standard mortgage repayment scheme), they will be able to recoup any such shortfall from the person who is standing as the guarantor for your loan.

This person needs to be a trusted family member or friend, and they must understand what's required of them, given that they will be required to pay any shortfall in your repayments.

Since they are using their own home as surety against your loan, they also need to understand that, if they can't pay any amount that's outstanding, their own home is at risk, too.

Family deposit mortgage

This is another way of securing a loan for your purchase by family members using their own homes or by chipping in to create a savings account into which they pay an agreed percentage of the value of the home you are looking to buy. 

Operating a savings account scheme gives them the usual interest-related dividends each year but they are unable to touch any of that money.

By maintaining your mortgage with the regular repayments and by meeting any other conditions applied by the mortgage lender, they will eventually be allowed to access that saved money.

Using their property to secure your loan, once again, should there be a default on any payments or other conditions not being met, means that their property will be at risk.

The advantages of taking out a zero-deposit mortgage are quite clear.

• No deposit - as the name of the loan suggests, you won't have to save up a large pot of money to satisfy the mortgage lender's criteria for a standard loan.
• Getting on the property ladder sooner - one of the principal problems facing many people who have yet to buy a property is the problem of saving up enough money for a deposit on a house, which is subject to house price inflation which is rising faster than the usual affordability marker - the level of wages or salary received per annum. It is also an issue with renters, who are faced with high rent payments each month leaving little to put buy to build up a deposit for a home. Without the need to provide a deposit, you'll be able to get onto that property ladder's first rung much sooner.
• Mortgage repayments v. renting cheaper? - one of the considerations for those who are currently renting is that, although a zero-deposit mortgage will almost certainly have higher monthly repayments, these may be much lower than the rental costs.
• Future mortgage prospects improved - if you maintain a perfect repayment record with your lender, you'll be in a far better position when it comes to looking at the next property when you are looking at new mortgage products to assist with its purchase. Or you will be in a better financial position to look at what remortgaging offers are available so that you can get a better deal on the current property.

While the benefits of a zero-deposit mortgage are clear, the levels of risk and the drawbacks also need to be understood before contacting the banks or building societies.

• Mortgage rates - as already stated, the level of risk that a mortgage lender is undertaking by giving you a zero-deposit loan means that they will likely want more in repayments to cover it. Therefore, the rates will probably be higher, while the monthly repayments will be greater than for a standard mortgage with a reasonable deposit applied. With a deposit as low as 5%, you may find that the rates and repayment scheme is far more beneficial.
• Negative equity - negative equity arises when the value of a property is less than the amount borrowed on the property. Although the housing market is generally buoyant (as at November 2024), this may not always be the case and there are historical cases of a market slump. If you have taken out a 100% mortgage, you may find that even a small deflation on any of the house price indices will therefore take you into negative equity - this can be a problem if you are looking for a sale later on, particularly with a view to buying something else.
• Guarantors and Family Depositers - with friends and family pitching in to help you buy your desired home, there is a risk that they will put their property in jeopardy, or they will lose their savings if you are unable to meet the mortgage company's conditions of the loan.
• Stretched finances - if you are seriously looking to opt for a zero-deposit mortgage, this is probably an indication that your financial position is fragile. By taking out such a loan, this might then extend your finances to the point of breaking.
• Lending criteria - your mortgage company will want to know that you are in a sound position of affordability, which means they will impose a number of strict conditions - stricter than for a standard mortgage - to verify that you are a suitable risk for their investment.

As shown here, the prospect of taking out a zero-deposit mortgage is higher risk than for one taken out with a sizeable deposit.

Therefore, you might want to look at possible alternatives to identify ways in reducing that level of risk and even reducing the pressure on your finances.

• Saving a deposit - perhaps the most obvious solution is to stick to building up your deposit. You might possibly look to friends and family to assist you with finding the necessary money.
• Mortgage Guarantee Scheme - the Government is currently running a scheme to assist buyers who have a small deposit already saved to buy the home they want. As with all governmental schemes, this is not planned to be an ongoing availability and is currently running until June 2025.
• Help to Build - if you are planning on building your own, the government is also providing a scheme to assist with that process. 
• Shared Ownership- this scheme allows you to buy part of the property while paying rent on the remainder.
• Right to Buy - if you live in a council property and you meet certain strict criteria, you will be able to buy that property at a reduced rate.
• Taking out a joint mortgage - if you are planning to buy a home with someone else (whether a partner who will live there with you, or someone who is helping you with the mortgage), taking out a joint mortgage will reduce the level of your personal risk, but may also improve the chances of building up a deposit and the amount that you can borrow.
• Taking out a Joint Borrower, Sole Proprietor (JBSP) mortgage - A JBSP mortgage is like a standard mortgage but with only one of the borrowers' names appearing on the property's deeds as the proprietor. The problem with joining forces with someone to take out a mortgage, where both names appear on the deeds, comes when they currently own a different property - they will be subject to the stamp duty (SDLT) payable on a second home (which has just become more critical with the increase in SDLT for second homes announced in the Autumn Budget 2024). With the JBSP mortgage, this SDLT situation is avoided, and you will have reduced repayments because you are paying a percentage of them each month.

As with all loans, you need to be aware that any defaulting on repayments will impact the credit rating, both personally and for anyone who is standing as guarantor or is involved in the supply of the mortgage loan. 

In the worst-case scenario, any property involved in the process of obtaining a loan, whether as a zero-deposit mortgage or as part of a scheme, can be lost as the lender is within their rights to take ownership and to sell it to recoup their financial outlay.

In addition, you need to consider the situations where you might be unable to pay back any of the repayments - the most common ones are illness suspending your income, a change of job reducing the levels of income and affordability and, in the worst-case scenario, losing your job. Ask yourself how you'd deal with the financial debt and simple day-to-day bills in these cases.

If you are considering a purchase or sale of a property, you'll want to make sure the process is as trouble-free as possible, so why not talk to us at Homeward Legal today about your plans?

The experts at Homeward Legal are well-versed in all aspects of the conveyancing process, providing a quality service at a fee that is great value for money!

Call  to get your conveyancing quote started, or to discuss your concerns with your plans to purchase or sell your next home.