The main benefit of a no deposit mortgage is that you can buy a home without saving for a deposit, and some don't even need a guarantor. But should you choose this option?
No deposit mortgages, also known as 100% mortgages or zero deposit mortgages, have been around for a while, but since the 2008 financial crisis until recently, you could only get one if a homeowner was willing to be your guarantor.
For the 35% of the UK population who rent their homes, being able to buy without a deposit even if they don’t have a guarantor could be their best shot at buying their first home.
So, what’s the catch?
How a no deposit mortgage works
With a no deposit mortgage, the bank lends you the money for 100% of the cost of the home. You’ll pay this back over time plus interest.
Banks are taking on more risk because you won’t lose your own money if you don’t keep up with your payments, so there’s less reason to do so. Because of this, there are more rules than you would normally see and the interest rates tend to be higher than other types of mortgage.
Generally speaking, the interest rates on even a 95% mortgage will be better, so if you can save even a small deposit then it might make more financial sense to do so.
But if the cost of rent means you can’t save enough for a deposit, even if you take advantage of the bonus you get with a lifetime ISA, a 100% mortgage could allow you to still become a homeowner and start paying off a mortgage instead of paying your landlord rent.
Are no deposit mortgages new?
No deposit mortgages aren’t actually new, but those that have been on the market since the financial crisis in 2008 all required you to have a guarantor who already owns their own property. This person would be responsible if you missed any mortgage payments.
The new type of no deposit and no guarantor mortgages aren’t new either. They were around before the financial crisis and were offered by most large lenders.
They were taken off the market shortly after the 2008 financial crash, which was partly caused by cheap credit and relaxed lending standards - particularly when it came to property.
No deposit mortgages have now been brought back as more and more people are struggling to find their place on the property ladder. The rules are much tighter this time round, for example you have to prove that taking on the mortgage won’t mean you’re paying more each month than you currently are in rent.
Am I eligible for a no deposit mortgage?
The rules for no deposit mortgages tend to vary between different providers and can be quite strict.
To give you an example, we've taken a look at the no deposit mortgage requirements for Skipton Building Society’s Track Record Mortgage when it first came on the market:
- You have to be at least 21 years old
- You can only use the mortgage to buy your first home
- You need to show you’ve paid at least 12 months of rent in a row within the last 18 months
- You also need to show you’ve paid all your bills during that same time period
- You can’t have missed any debt or bill payments in the last six months
- You have to show you can afford the monthly mortgage payments, which can’t be any higher than your current rent payments
- You need to have good credit history
- The property you want to buy can’t cost more than £600,000
- The property also can’t be a new build flat (but can be a new build house)
The pros and cons of a no deposit mortgage
These are the main pros and cons for buyers looking to buy a home through a no deposit mortgage with no guarantor.
| Pros | Cons |
|---|---|
| You don’t need to save up for a deposit | You’re likely to be charged a higher interest rate than you would if you put down a deposit (even as little as 5%). |
| You can get on the property ladder sooner | If the value of the property has gone down when you decide to sell, you could end up owing the bank more than you borrowed |
| You can do home improvements to increase the property’s value | The affordability and credit checks are stricter - you might not be accepted |
| You will be paying off some of your mortgage each month so you'll own more of the property over time |
Is a no deposit mortgage right for me?
Buying your first home is a big commitment but for many people, it’s a good financial move.
The main thing to be aware of with no deposit mortgages is that you’ll probably pay more in the long term for your chosen property than you would do if you were able to pay a deposit, because the interest rates are likely to be higher.
If the current interest rates are putting you off and you’d rather spend some time building up a deposit, rather than jump into a no deposit mortgage, a lifetime ISA could help as the government tops up the money you save by up to £1,000 a year.
How can a lifetime ISA help me buy my first home?
By boosting your first-home deposit fund by up to £1,000 a year!
Lifetime ISAs are designed to help you buy your first home or save extra for retirement. Every time you pay in, the government tops up your payment by 25%.
You can invest up to £4,000 each tax year - if you reach this maximum, you'll get £1,000 from the government added to your lifetime ISA!
And, if you’re planning on buying with a partner who is also a first-time buyer, you can both use a separate lifetime ISA towards the same property, so you have double the bonus available.
Just be aware that if you withdraw the money in your lifetime ISA for anything other than buying your first home or after you turn 60, you’ll have to pay a 25% withdrawal charge on everything you take out.
OneFamily's Lifetime ISA invests in stocks and shares. This gives your money good potential to grow, but the value is likely to go both up and down over time and there is a risk you could get back less than you put in.
