What is a no deposit mortgage and how does it work?
Skipton Building Society currently offers a no deposit mortgage that doesn’t need a guarantor, meaning you can buy a home without saving for a deposit. But should you?
No deposit mortgages, also called 100% mortgages or zero deposit mortgages, have been around for a while, but before now 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, like the one offered by Skipton, 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.
Skipton Building Society’s Track Record Mortgage
Skipton Building Society’s Track Record Mortgage is aimed at renters looking to buy their first home. Skipton has a list of rules in place to make sure only people who can (and will) make the mortgage payments are accepted. These are:
- 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)
It seems like everything renters have been waiting for: a zero deposit mortgage that takes into account how much you’re already paying, rather than how much the bank thinks you can afford.
But buying your first home is a big commitment, so there’s a few things to consider before you make your final decision.
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 zero deposit mortgage with no guarantor, like Skipton’s Track Record Mortgage.
| 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 |
The benefits of no deposit mortgages
You don’t need to save up for a deposit
It’s right there in the name! One of the hardest parts of buying your first home is saving up for that initial down-payment, especially if you’re already renting.
Even if they use a lifetime ISA, it can take most renters years to save up even a 5% deposit due to cost of living and rent, and some have given up trying.
You can get on the property ladder sooner
The younger you are when you take out a mortgage, the more time you have before retirement to pay it off and become mortgage-free. Every month that you’re paying off a mortgage rather than paying your landlord rent not only feels great, it’s also putting you in a better financial position.
You can increase the value of your property and how much you own
By not having to save for a deposit, you could instead put some money away for home improvements or overpay your mortgage so that you own more of the property and owe the bank less.
Spending money on home improvements could be more cost-effective than saving if you buy a house that needs work and can increase its value by more than the work costs.
Plus you can turn your first home into your dream home.
The downsides of no deposit mortgages
Interest rates are higher than they are for normal mortgages
This is an important one to consider. Interest rates on regular mortgages (mortgages that ask you to pay a deposit) are already quite high - currently around 4.79% on average for a five-year fixed-rate term.
But the rates for no deposit mortgages tend to be higher. Skipton's Track Record Mortgage, for example, starts at a 5.35% interest rate, which increases to 6.79% after 31 May 2029. That's 1% higher than the current rate for a mortgage with a 5% deposit, which may not sound like a lot but can make a big difference in your repayments when weighed against the full value of a house.
A higher mortgage rate means more of the money you pay each month is paying off interest rather than paying off the money you owe. Over the repayment term (the time you’re paying your mortgage off for) you’ll pay more to the bank than you would with a lower interest rate.
This means that a property could cost you more in the long run than it would if you put down a deposit.
You are more likely to lose money if the property value goes down
When you put down a deposit, even as little as 5%, you’re directly buying part of your home - that’s how much of the property you own from the start.
If you choose a no deposit mortgage, you won’t “own” any of the property and will owe the bank the amount that you bought it for.
So, if the value of the property goes down, you might find that you owe more on your mortgage than what your home is worth. This is called negative equity. It only becomes a problem when you want to sell as you’ll need to pay back the mortgage from the money you sell your property for.
The affordability and credit checks may be too strict for you
You do need to be in a fairly good financial position already to qualify for this type of mortgage.
With cost of living going up, many people in the UK are dealing with some sort of debt. Some are even taking out loans to keep up with bills. Credit scores take a while to fix, especially if you don’t have the money set aside to completely pay off your debts.
The mortgage is also only available to people who are currently renting and can prove that they have paid their rent and bills on time every month for at least 12 months. This may rule some people out.
It’s unlikely that you’ll be able to buy a property of the same value as the one you’re renting. Even if you show you’ve been paying a high rent for a long time, the lender will rarely agree that you can afford the same amount in mortgage payments.
For example, someone paying £1,400 a month for rent can only afford a property valued at £261,018 or less on a 35 year term, according to Skipton’s Track Record Calculator. That same amount of monthly rent, being paid for that same 35 year period, adds up to around £500,000.
Is a no deposit mortgage right for you?
Buying your first home is a big commitment but for many people, it’s a good financial move.
No deposit mortgages, especially those that don’t ask for a guarantor, may seem like the perfect solution for renters hoping to buy and struggling to save up. But there’s pros and cons to everything and these products are no exception.
The main thing to be aware of is that you’ll probably pay more in the long term for your chosen property than you would if you’re able to pay a deposit, because the interest rates are likely to be higher for no deposit mortgages.
While putting down a deposit does put you in a better financial position, property prices might go up while you’re saving so it’s worth looking at how long that could take you and weighing up if it’s worth it.
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 25%.
How can a lifetime ISA help me buy my first home?
A lifetime ISA, available in either cash or stocks and shares, is a product designed to help you save for your first home or save for retirement. The main benefit of a lifetime ISA is the 25% government bonus you get on everything you put in.
You can save or invest up to £4,000 per tax year into a lifetime ISA. This means the government could give you up to £1,000 every year towards your mortgage deposit!
If you’re planning on buying your first home with a partner, they can open their own lifetime ISA and you can use both towards the deposit.
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% penalty fee on everything you take out. While this means you need to be sure that you want to use the money to buy your first home, it does mean you’re less likely to dip into your deposit fund.
OneFamily Lifetime ISA
If you want to save for your first home or for life after 60, our Lifetime ISA could help. You'll gain a 25% boost from the government on top of your savings, as well as any potential stocks and shares returns.
Our Lifetime ISA invests in stocks and shares. This means it has good long-term growth potential, but the value of your investments could go down as well as up so you could end up with less money than you've put in.
More on buying your first home
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