For whatever reason, you don’t have the luxury of being able to afford the deposit on a new mortgage. Don’t worry, all is not lost. You still have some options.
So how do I get a mortgage with no deposit?
- Budget your spending, look into the Help to Buy: ISA program to help your savings grow as quickly as possible while you explore no deposit options
- Look into government schemes you may be eligible for which could reduce the principal, or reduce the deposit directly
- Do research on the mortgage market using the internet and a mortgage broker/adviser.
- Explore the possibility of receiving a mortgage deposit gift from close relations.
- Look into opportunities to gain equity for a deposit through discounts and incentives from the seller or developer.
- Find the mortgage available to you with the lowest and most lenient deposit requirement.
- Explore the possibility of using a personal loan to borrow any money still needed for the deposit.
- Consider using credit cards for expenses in order to put all earnings into savings to be used toward a partial deposit.
- Consider shared ownership mortgages
When considering purchasing property, think carefully. Some of the above steps and the following suggestions shouldn’t be taken on without adequate realism – make sure you have done ample research and made careful consideration of your options. It is also important that you get professional advice from mortgage advisors and/or mortgage brokers before making a decision on something as big as a mortgage.
Why No Deposit?
Often people looking for a mortgage aren’t able to pay a deposit of 10-20% but have the income to repay a mortgage. For these people, a mortgage with no deposit can seem like it is the perfect solution, but do such mortgages even exist? And, if so, How does one get a mortgage with no deposit? What are the disadvantages of a no deposit mortgage?
Yes, no deposit mortgages do exist, but not as explicit terms in a mortgage offering itself. Paying a 0% deposit requires the home buyer to find another means to reduce the risk to the lender without a cash deposit.
There are ways in which a deposit may be made without having or having to give up cash. Continue reading to discover how to set up a mortgage and possibly eliminate the need for a cash deposit.
Who Can Get A Mortgage With No Deposit?
Getting a mortgage without putting up your own cash for the deposit will not be possible for everyone. Some suggestions to reduce or eliminate the need for a deposit will not apply to you, while others may fit your circumstances.
Some people are able to get a mortgage without a cash deposit, but not everyone. Whether you can get a mortgage without a cash deposit or not is going to depend on a lot of factors such as;
- The Lender
- Whether the home is new-built or not
- Whether you are a first-time homebuyer
- Whether the mortgage is for a primary or secondary home
- The Income of the individual(s) applying for the mortgage
- The Outgoings of the individual(s) applying for the mortgage
- Eligibility for government home buying schemes
- Credit history and credit score
Ultimately something must replace the deposit – Banks and lenders need the security of having an asset worth more than the principal as leverage, incentive and risk management.
The 100% Loan To Value Mortgage
A mortgage lender can’t lend 100% of the value of a property – if they did, the could suffer severe losses if the mortgage were foreclosed on and the property sold below the value of the principal borrowed from the lender.
With a traditional cash deposit, the risk to the lender is minimal, as the deposit plus the value of the property prevent them from losing money even in the case of foreclosure. This is why getting a no deposit mortgage is so tricky. Despite this, there are many ways to give the bank a sense of security without draining your bank account or saving for years.
If a lender feels a debt will profit them whether it is repaid or not, they will likely entertain the application. The key to getting a no deposit mortgage is making a lender feel there is no risk to them.
The trick to getting a mortgage without forking up 10-20% of the cost of buying the home is to offer equity, security or even a traditional cash deposit without using your own money.
Make That Deposit Without Grabbing Your Wallet
Gifted Mortgage Deposits
One possible means to solve the problem of coming up with the money to cover a deposit is to receive the funds in the form of cash from a friend or relative, or the form of equity from a property seller.
Deposit Funded by a Gift From a Friend or Family Member
A gifted deposit is exactly what it sounds like. It’s when a family or friend gives money toward a mortgage deposit. In order to use a gifted deposit, the contribution legally must be a gift, and lenders will insist on the donor signing documentation confirming the recipient has no repayment obligation.
Close relatives are accepted without question from banks and lenders, however, more distant relatives and friends may encounter more rigid rules surrounding gifting the mortgage deposit.
Getting a family member to gift you your deposit is a good means to get a 0% down mortgage, and it is the form of gifted deposit which is viewed most favourably by lenders.
Gifts Of Equity As Payment Of Deposit
Vender, builder, developer and landlord-gifted deposits attained through the purchase of a home below its market value are considered more cautiously than gifted cash deposits. Due to this fact, fewer lenders will be available to those using equity resulting from a seller-gifted deposit.
This is especially true if the equity resulting from the discount is intended to cover the entirety of the deposit requirement. It is likely a lender will want to assure the original asking price accurately reflected the true property value.
Lenders are likely to discourage or simply refuse to allow equity exclusively in the form of a vendor offered discount and may request the buyer at least contribute somewhat to the deposit to decrease the risk associated with the loan and help confirm the buyer’s commitment to the repayment of the loan.
Deposit Funded by a Gift From A Vendor
A vendor may be able to give you the gift of equity as a means to meet the deposit requirements of your mortgage. Vendor gifted deposits can be utilised when a vender agrees to sell a home or property at a discounted price.
A vendor may be willing to reduce the price of the property by offering a discount for a quick sale. This discount can likely be considered a deposit in the form of equity as the home’s value exceeds the principal, the same result as someone paying full price with a 10% deposit in cash.
Deposit Funded by a Gift From A Developer
This is essentially the same situation as described above, but here a builder or developer offers a discount on the cost of the home, which is used as equity, allowing the buyer to purchase the home with a loan for 80-95% of the value of the property.
The gift in this circumstance is offered as an incentive by a builder or developer and will only apply to new builds.
Because new builds are considered higher risk, deposits 15% and greater are common, while the discounts offered by the builders are rarely more than 10%, so getting a mortgage with no deposit using this method might not be as likely as a vendor gifted deposit.
Deposited Funded By A Gift From A Landlord
Yet another means by which the deposit may be satisfied by equity comes through a discount offered by a landlord. Just like the other approaches to funding a deposit, a price discount acts as equity and may be capable of acting as your deposit.
Using Government Schemes For Deposit Help
Many individuals in the United Kingdom are eligible for some form of help from the government when trying to buy a home. If you are looking to pay the lowest possible deposit, there are several schemes which may be of service to you.
Shared Ownership Mortgages
The shared ownership mortgage scheme is a means by which the government helps lower-income and first-time home-buyers secure financing and buy property. With a shared ownership mortgage, the buyer effectively takes out a mortgage for between 25-75% of the total value of the property.
A buyer using this program will have to pay rent for the portion of the property that is not purchased. The result is a smaller mortgage and a smaller deposit but incomplete ownership. The deposits represent the ownership, so a 25% ownership will require a deposit which is 75% less than buying the property whole.
Typically a shared ownership property mortgage deposit will be between 5% and 10%, although some lenders offer mortgages that don’t require a deposit for certain individuals taking advantage of this program.
Right to Buy Mortgages
Right to buy is a government scheme intended to help council and housing association tenants that want to buy their home. Right to Buy offers significant discounts to eligible individuals based on how long they have been a tenant. Different base rates are available for houses versus flats, with the number of years spent as a tenant adding to that discount.
For buying a house or flat using Right to Buy, 3 years of tenancy is required at an eligible residence. For each year beyond 5 years, you will earn an additional 1% off houses or 2% if you intend to purchase a flat. The discount starts at 35% for homes and 50% for flats. Both are limited to no more than a 70% discount, and the total dollar value of that discount cannot exceed £77,900 outside of London or £103,900 in London.
Getting a no deposit mortgage for a home or flat using the Right to Buy scheme is actually fairly common. Often lenders are willing to use the considerable discount as a form of equity deposit, allowing the buyer to acquire a mortgage with no out-of-pocket deposit!
Help to Buy Equity Loans
The Help to Buy equity loan programme is a government scheme which provides an equity loan for up to 20% of the home purchase and is available throughout the UK. In the city of London, the same program will contribute up to 40%. Both loans require a minimum of a 5% deposit. The equity loan is interest-free for the first five years. This program can be applied to homes selling for up to £600,000, but can only be applied to new-build homes.
Although this isn’t a no deposit option, it is a means to save a lot of interest with a very small 5% minimum deposit.
In addition, if used in concert with some other means to reduce a deposit, it would be conceivable for someone to be able to use this program to help them realize a mortgage deposit that is very low or zero while also providing great repayment terms.
Help to Buy: ISA
There is another scheme available to help people to buy homes and afford deposits. The Help to Buy: ISA scheme helps people save for the deposit on their first home purchase. The program contributes 25% of what you save a month, up to £3,000 per person, or £6,000 for partnerships.
This is an opportunity for those struggling to save a deposit to get some encouragement along with a tangible financial incentive. This program could help someone acquire a very low or even zero out of pocket deposit – money saved in this way could be used to bolster the deposit without the buyer having to save every penny. It would be especially useful in conjunction with some of the other means to reduce the deposit.
Using A Smaller Loan To Get The Bigger Loan
Use A Personal Loan To Make Deposit
If you have adequate income and can confidently make payments on both a personal loan and a mortgage simultaneously, this is an option. To do this you would need to be approved for both the mortgage and the personal loan.
Using a personal loan to pay a deposit is somewhat taboo for many lenders, so many lenders won’t be willing to offer you a mortgage at all if this is how you plan to pay the deposit. Although not common, some lenders will consider such an applicant in the right circumstances.
Typically, the largest variable is whether the applicant can afford the loan and the mortgage when all income and expenses are taken into account. Another matter for concern for the bank will be the reason as to why an individual with such income wouldn’t have adequate savings.
Even lenders receptive to using a personal loan to cover the deposit will still consider the mortgage to be a higher risk, so higher interest rates and fees would be likely.
In addition to your income and expenses, the lender will look at your credit report. In order to have any chance of getting a mortgage where the deposit is paid by a personal loan, a clear credit history is going to be essential.
If you are considering using a personal loan to make the deposit, try to get the mortgage with the lowest deposit you can in order to minimise the amount of high-interest personal loan debt you will have to take on.
Using a Credit Card to Make a Deposit
Credit cards cannot be used for a mortgage deposit in full, although some lenders may be willing to consider using a credit card to meet a small portion of the deposit requirements if the deposit is nearly met by some other means of payment or equity.
A more powerful means by which a borrower could use a credit card to accumulate the money required for a deposit would be to shift all spending onto the credit card. If all of your expenses are put onto a credit card, all of your income can be saved to pay a deposit.
Ultimately, you are still borrowing the amount of money to pay the deposit, it’s just that the card is purchasing food, bills, gas and other living expenses allowing your income to be freed up to be saved and used to pay the deposit.
For someone considering doing something like this, it is important to be sure that the debt you are amassing on the credit card isn’t too much for you to make at least the minimum payments on time every time. Do not take on more debt than you can afford.
About No Deposit Loans
When attempting to be approved for a mortgage using no deposit your personal and financial circumstances will influence the terms of the mortgage, the terms of any related loans, the eligibility in certain programmes, and the availability of certain opportunities. Because of the complexity of the factors involved, obtaining a no deposit loan is simply not something everyone will be able to accomplish.
Another fact is that most terms associated with no deposit mortgages are often less favourable and more costly for the buyer. Because of the costly terms of many of these loans, the advantage of no deposit really needs to be significant for the prospective buyer – such as when getting a mortgage in the near term is of paramount importance.
Maybe your dream home is on the market or maybe a mortgage is actually cheaper than your rent even with the interest rates associated with a no deposit mortgage – whatever your reason, be sure it justifies the cost of the no deposit mortgage. Remember, in many circumstances, saving to pay a deposit makes more financial sense.
For People With Bad Credit or Credit Issues
If you have bad credit or even fair credit trying to pay no deposit for a mortgage is going to be somewhat unlikely. Some situations would not be influenced as significantly by credit score as others, and some adverse credit doesn’t mean a no deposit mortgage is impossible, it just gets much less likely.
If you do have bad credit and you are trying to receive a mortgage without putting any money down as a deposit, you should expect to pay high costs associated with the loan, unless you use something like “Right to Own”, which would off-set the deposit issue with the equity gained thanks to the price discount.