How to Get a Mortgage with No Deposit: A Guide for First-Time Buyers

• If you’re finding it difficult to accumulate a down payment for your first home, you might have the opportunity to enter the housing market with a 100% Loan-to-Value (LTV) mortgage, commonly referred to as a no deposit mortgage. In this guide, we provide a comprehensive overview of how this mortgage type functions and explore the available options.

What are the benefits of a zero-deposit mortgage?

Of course, the primary advantage of a zero-deposit mortgage is that you are not required to make a large down payment or request someone to act as your guarantor.

This renders no-deposit mortgages especially appealing to tenants who find it difficult to save money, as their monthly rent expenses exceed what they would pay for a mortgage.

Saving even a five percent down payment can be challenging, particularly for prospective homeowners seeking a mortgage on their own. Therefore, having the option to secure a mortgage without a deposit is crucial for assisting first-time buyers in entering the housing market.

Nonetheless, it’s crucial to remember that zero-deposit mortgages carry considerably higher interest rates compared to mortgage plans that require even a five percent down payment.

Lenders provide mortgage options that require no initial deposit but come with elevated interest rates and more stringent conditions. This is because the lenders are investing a larger sum, and the borrower does not face the risk of losing personal funds if they fail to meet the repayment obligations.

Typically, this implies that over time, you will end up spending more on a property compared to if you had put down a deposit. Additionally, the criteria for qualifying for this kind of mortgage are more rigorous, resulting in a lower likelihood of approval for many applicants due to strict affordability guidelines.

If you’re uncertain about whether the advantages of a zero-deposit mortgage for first-time buyers surpass the possible expenses, it’s crucial to obtain the appropriate guidance.

At Montgomery Financial, our seasoned mortgage consultants can evaluate your unique requirements and financial circumstances, assisting you in determining the most suitable mortgage option for you.

Is it possible to get a mortgage without a deposit?

Put simply, yes, it is possible to obtain a mortgage without a deposit in the UK.

Nevertheless, although zero-deposit mortgages are available in the UK, they are provided by only a few lenders. Furthermore, these lenders typically offer a zero-deposit mortgage for a loan amount that does not exceed 4.5 times your income (for couples, the loan is based on their combined income).

Consequently, if you choose a mortgage without a down payment, you won’t be able to borrow more than the property’s worth. Additionally, the lender will impose more stringent requirements that applicants must satisfy to qualify for this type of mortgage.

Generally, borrowers must align with the lender’s preferred credit score and successfully complete essential affordability assessments. Consequently, it may be more challenging for purchasers, particularly those buying for the first time or applying individually, to meet these affordability criteria and secure this kind of mortgage.

Can first-time buyers get a mortgage with no deposit?

Absolutely, they can! If you’re eager to secure a first-time buyer mortgage without a deposit, you’ll be happy to know that a major lender has recently reintroduced zero or no deposit mortgages for first-time buyers.

In May 2023, Skipton Building Society launched a mortgage that requires no deposit, aimed at renters seeking an easier path to owning a home and getting on the property ladder.

What is a no deposit mortgage?

A no deposit mortgage, often referred to as a 100% loan to value (LTV) mortgage, necessitates no initial payment and covers the full cost of the property being acquired.

How much deposit is needed to buy a house?

Typically, the majority of lenders require a minimum deposit of 5% to contribute towards the purchase price of your home, meaning you would need to secure a 95% loan-to-value (LTV) mortgage. However, with a 100% mortgage, you can borrow the entire value of the property from the bank or building society without needing to provide any upfront payment.

How do mortgage deposits work?

House down payments are calculated as a fraction of the property’s worth that you pay using your savings. You then need to secure a home loan or mortgage to finance the remaining amount of the purchase price.

Typically, the minimum down payment required is 5%. Therefore, if you were purchasing a property for £200,000, you would need to save £10,000. Consequently, the mortgage would have a loan to value ratio of 95%, as it would finance 95% of the property’s price.

The more you can save for a down payment, the better your odds of getting approved for a mortgage and securing a lower interest rate. For example, if a house costs £200,000, you would need to save £20,000 for a 10% deposit, £30,000 for a 15% deposit, £40,000 for a 20% deposit, and so on.

The best interest rates are typically available to individuals who can provide a deposit of at least 40% (resulting in a 60% loan-to-value ratio). For instance, this would mean having £80,000 for a property valued at £200,000, which can be challenging for those looking to get on the property ladder.

100% mortgages and guarantor mortgages

A different option to 100% mortgages is guarantor mortgages. These typically involve having a family member (or friend) who owns a home to also be listed on your mortgage. They must consent to cover any mortgage repayments you fail to make, and either:

• Use their own property as collateral: Your mortgage lender would place a lien on your guarantor’s residence, allowing them to recover funds from the guarantor or potentially foreclose on their home if you default significantly on your mortgage payments.

• Utilize their savings as collateral: Your guarantor deposits a substantial amount into a savings account with the mortgage lender, serving as collateral. The guarantor is unable to access the funds until you have repaid a specified portion of your mortgage.

As a result, your guarantor’s personal assets or savings could be jeopardized if you do not make your payments promptly.

Can I get a no deposit mortgage?

Here’s what you need to know: 

• Exclusive to first-time purchasers
• A history of timely rent and bill payments over the past 12-18 months is required
• Your mortgage payments must not exceed your previous rent payments
• You can secure a loan up to 4.5 times your annual income
• And up to a maximum of £600,000
• This offer is available solely with a 5-year fixed-rate mortgage at an interest rate of 5.65%

There are also a few other requirements:

• You need to be older than 21.
• You may qualify with a co-applicant.
• Newly constructed apartments do not qualify.
• You must have a perfect payment history on all debts and credit obligations.
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Can I get a 100% mortgage without a guarantor?

If you qualify, Skipton Building Society might assist you in obtaining a mortgage. However, if your application is denied, you could explore the option of having a guarantor.

If you can’t secure a guarantor, there are numerous alternative methods to expedite your entry into the property market and purchase a home with a small deposit.

There are also various programs and loans available for first-time homebuyers. We will provide further details about these programs later.

What are the advantages of 100% mortgages?

The primary benefit of a 100% mortgage is that it allows you to purchase a home without needing a down payment, eliminating the necessity to save for years or waste money on renting.

What are the disadvantages of 100% mortgages?

No deposit mortgages come with a number of drawbacks. Firstly, if you opt for a guarantor mortgage, you’ll need a friend or family member to serve as a guarantor—preferably someone with a solid credit history and sufficient income. Should you succeed in securing a guarantor, keep in mind that their savings or property could be jeopardized, depending on the terms of the agreement.

Another disadvantage is that mortgages with no down payment come with significantly higher interest rates than those that require a deposit. Additionally, application fees can be more expensive, and you will often have to pay a higher lending charge, which is a fee for borrowing with little or no deposit.

A third issue arises if the value of your house decreases. This can result in a scenario called negative equity, where the amount of the loan secured by your home exceeds the home’s market value, which is a risk when you take out a mortgage without a deposit.

If you can continue making your mortgage payments, this isn’t a significant issue. However, if you need to sell your property, you’ll have to personally cover the difference between the home’s market value and the remaining loan balance, which could potentially leave you stuck in your current residence. 

How to buy a house in UK with zero deposit

Keen to be a first-time homebuyer with a zero deposit mortgage but don’t know where to begin? Although Skipton Building Society offers a novel 100 percent no-deposit mortgage, there are numerous other options available for purchasing a home without needing a deposit.

To assist you in grasping the numerous choices at your disposal as a first-time homebuyer, we delve into several methods by which you can achieve homeownership for the first time – all without dedicating years to rigorous saving.

Guarantor mortgages

It’s important to remember, though, that certain no-deposit mortgage plans for first-time buyers may necessitate a guarantor instead.

This type of mortgage, commonly known as a guarantor mortgage, is designed for potential homebuyers who lack the necessary income to secure a mortgage on their own.

Individual applicants, in contrast to dual-income couples, are more inclined to seek a guarantor mortgage. By including a guarantor in the contract, lenders can mitigate their risk since the guarantor is obligated to repay the loan if the applicant fails to meet their mortgage obligations..

Only a few lenders provide guarantor mortgages, which can complicate the process of finding a suitable deal because of the restricted choices. We can assess your options and offer expert advice on the best course of action, particularly for a first-time homebuyer.

Gifted deposits

If you lack the savings to support your aspirations of owning a home, a relative or friend might propose a gifted deposit. This involves receiving a sum of money, either in full or in part, from someone else.

This individual is usually someone you have a close relationship with and who has accumulated sufficient savings to provide assistance, such as a grandparent, parent, or sibling, especially when you’re a first-time buyer. A gifted deposit can be as large as 20 percent or more, or it can be combined with your existing five percent deposit to form a more significant 10 percent deposit.

Although numerous lenders are comfortable with accepting gifted deposits for properties, some may not be. Consequently, it is crucial to be transparent with your mortgage advisor or lender to ensure a seamless home-buying process.

Remortgaging to release equity from another property

Although this no-deposit scheme might not be ideal for first-time homebuyers, it can be a convenient method for acquiring additional property without the need to save or sell existing assets!

This approach entails tapping into the equity of another property you possess to fund a down payment on a new home. To achieve this, you would need to refinance your existing property.

Personal loans

An alternative path to owning a home that you might have thought about is securing a personal loan. Nonetheless, these loans, also known as unsecured loans, often carry much higher interest rates and must be repaid within a shorter timeframe.

From the perspective of lenders, individuals with these personal loans are frequently viewed as higher risk, rendering them less appealing as applicants. Although unsecured loans can significantly affect an applicant’s affordability, certain lenders may still be willing to provide mortgages to these potential homeowners if they can manage their mortgage repayments.

Credit cards

Credit cards are akin to personal loans in that lenders generally frown upon applicants using borrowed money for their deposit. Nonetheless, it is uncommon for credit cards to cover the full deposit amount.

Rather, they are typically utilized to supplement cash deposits for individuals worried about the amount of their savings. Similar to applicants who take out personal loans to increase their deposit, though, there may be a smaller number of lenders willing to provide you with a mortgage.

Government’s Right to Buy scheme

If you are presently renting a council property and are eager to own a home, you might be interested in exploring the government’s Right to Buy program.

Created to assist qualified social housing residents in acquiring their council home, this program offers them the chance to purchase the property at a reduced price, without a deposit, or to apply their discount towards the deposit.

It’s important to remember that this program is available only to a specific group of individuals. To be eligible to apply to buy the property, it must be self-contained, your sole or primary residence, and managed by a public sector landlord, such as a council or housing association, for a minimum of three years.

You should also be categorized as a ‘secure tenant,’ meaning you enjoy the advantages of a secure tenancy, a form of UK tenancy established by the Housing Act 1980.
There are only a limited number of lenders willing to collaborate with first-time buyers who have no mortgage to facilitate this setup, so it is often advisable to consult a specialist advisor