The short answer is Yes! But you will need the help of a guarantor
Can You Buy a House Without a Deposit?
You might think it is impossible to get a 100% mortgage, and a few years ago you would have been correct. Times change and as markets stabilise lenders are beginning to find new ways to help first time buyers.
This page will not discuss specific mortgage products, as they change daily. It will however give you an insight into the types of products available and what the pitfalls may be. For an up to date picture of the mortgage landscape, speak to one of our independent mortgage advisers.
What is a 100% Mortgage?
Prior to the Housing Market Crash of 2008, it was common for banks to finance the full purchase price of a property through a 100% mortgage. There were even some mortgage products at the time which would lend you 125% of the property’s value. A 100% mortgage meant you did not need to put forward any sort of deposit.
This was fantastic for house buyers at the time, but that excessive and aggressive lending came at a cost. When the housing market crashed, many homeowners found themselves with properties in negative equity. Meaning the property was no longer worth the amount of lending they took out.
In 2008 all these products were quickly removed from the markets as lenders tried to ride this sudden drop in asset value. In 2015, a new breed of 100% mortgages were introduced, but these do require external security.
How do 100% Mortgages Work?
This new breed of 100% mortgages work very differently than their pre-credit crunch counterparts. However, one aspect remains the same; you do not have to save for a deposit. The lender will need some form of additional security which is usually provided by a family member or guarantor. This security can take two forms.
- 1. Using a Guarantor’s Property as Security
- 2. Using a Guarantor’s Savings as Security
1. Property as Security.
Your lender will take your guarantor's property as security against the mortgage. The percentage of your mortgage that the lender will take as security will vary from lender to lender.
As an example, let's assume you are looking to purchase a property worth £200k. The lender may look for 25% security from your guarantor which would equate to £50K. Your your guarantor would need to have at least £50k in equity in their property. If your guarantor has their own mortgage, your lender may insist they keep their Loan to Value below a certain rate.
For example, if the guarantor has a mortgage of £90k on a property worth £200K their Loan to Value would be 45%. Your lender may insist their Loan to Value stays at 65% or below. Meaning they can only have £130k in mortgage and security combined. In this example the maximum they would be able to secure would be £40k, which would not be enough.
If your guarantor's property is accepted as security, your lender will take out a legal charge against the property. If you default on your mortgage, the lender can pursue your guarantor up to the value of the security given.
2. Savings as Security
This is an alternative to Property as Security. It would require your guarantor to have savings to the value of the percentage set by your lender. Your guarantor would need to place those savings into an account owned and operated by your lender for a set period of time.
Many lenders will hold this money for a set initial period. The capital payments you make during this time will build your equity in the property, which will eventually replace the security.
Things to note: Your guarantor will not be able to withdraw this money until then end of the security tie in period. The savings account might not pay them very much in interest, or could even be interest free. There are some products coming out that do pay interest, so shop around.
As with the “Property as Security” if you default on your mortgage, the lender can take the savings to rectify the shortfall.
Preston Baker are responsible agents, and we’d like to address the shortfalls of 100% mortgages first before we discuss any advantages.
Drawbacks to 100% Mortgages
They could have an extensive negative impact on your family's finances. Particularly if their is a housing market crash or if you default on your mortgage for any reason.
There are risks with 100% mortgages. However, these risks are now carried by you and your family. Whereas in pre credit-crunch 100% mortgages the risk was carried by the lenders.
You need a family member that has the equity or savings available, and would also be willing to take the risk.
Even if they believe the risk to them is minimal, it could still impact the rates of interest they get on their savings. They would be wise to think carefully before securing your property with their own assets.
If your guarantor has given security against their property this will affect their Loan to Value. During the tie in period, this may limit them to more expensive mortgage products or prevent them from withdrawing equity. This could delay any projects they were looking to finance, such as building an extension or perhaps investing in buy-to-let property.
100% mortgages tend to lean towards higher interest rates and charges when setting up. Also, some lenders may impose a monthly charge for the savings account your family member must use impacting on their savings potential.
They are a niche product, meaning the types of mortgage and choice in lenders is limited. It is likely that you will end up with a much higher rate of interest than a typical mortgage product.
Should the housing market take a dive, the value of your property could drop. With a property at 100% Loan to Value, this will mean your property is in negative equity. If you then sold the property for less than the mortgage value, your guarantor would have to make up the difference.
Many lenders may ask you to pay for a Mortgage Indemnity Guarantee Insurance Product. This would be a form of insurance the lender would take out to protect themselves from you defaulting on the loan. Though it is an insurance product for the lenders benefit, they could still insist that you pay this indemnity for them. Bear this in mind when budgeting and assessing whether you can afford the mortgage repayments.
Advantages of 100% mortgages
The obvious main advantage is the ability to get on the property ladder without a deposit. You must always take affordability into account. If you are unable to save for a deposit does this mean you are living close to your means already? Speak to a mortgage adviser who can assess your affordability and ensure this is the right path for you.
You might have been unable to save for a deposit due to satisfying existing loans and credit cards. If those debts have now gone, you may have the extra income available to buy a property using a 100% mortgage.
Remember: your financial circumstances are unique to you. There isn’t a one size fits all mortgage product out there. Also, a 100% mortgage cannot fix if you have bad credit or a poor credit score. Finding the right mortgage deal for your circumstances is essential.
That’s why it’s important to seek the advice of professional mortgage advisers when deciding how to proceed. Book an appointment if you’d like to speak to someone about your affordability and options.
It allows your family member an alternative to gifting you the deposit. Gifting a deposit tends to be the way most family members help with a deposit. Providing security allows your guarantor to recover their equity / savings when the tie in period ends..
They can provide a way for you to exit unsuitable properties. For instance if you are in an area / property that is no longer fit for purpose, with little to no equity.
Alternatives to 100% Mortgages
Help to Buy Schemes
Though many of these schemes require a deposit, it can be as low as 5%. To make buying a home more affordable you can combine Help to Buy Schemes. Have a look at Help to Buy: Equity Loan, Help to Buy:ISA and Help to Buy:Shared Ownership for more information. We would recommend reading about the Help to Buy Schemes in detail before you make a decision on a 100% mortgage.
A family member may decide to give you the deposit outright. Most lenders will insist on a declaration from the family member to say the money is a gift and will not require repaying. If it required repaying, it would be classed as a loan and a loan would affect how much you could borrow. It would also impact your monthly affordability from the lender's perspective.
Ultimately, the decision whether to opt for a 100% mortgage lies with you. Just ensure you do your research and budget properly. Is owning a home worth it if you have no disposable income to enjoy your life?
All mortgages are subject to the applicant(s) meeting the eligibility criteria of the lenders.
RISK WARNING: YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
This firm usually charges a fee for mortgage advice. The amount of fee will depend upon your circumstances and will be discussed and agreed with you at the earliest opportunity.
Preston Baker Financial Services Ltd (Registration number: 08149173) is an appointed representative of Primis Mortgage Network, a trading name of (Advance Mortgage Funding Limited/First Complete Limited) which is authorised and regulated by the Financial Conduct Authority. First Complete Ltd is a Registered Company (Registration Number 05416236). The Registered Address is Newcastle House, Albany Court, Newcastle Business Park, Newcastle Upon Tyne, NE4 7YB.
The guidance and/or advice contained within this website is subject to the UK regulatory regime and is therefore primarily targets at consumers based in the UK.