How to get a mortgage without a deposit
For most people, it is a life ambition to one day buy their own home, and enjoying the freedom and privileges that it brings. However, these days with the dramatic increase in house prices, the realisation of that dream to get onto the property ladder becomes ever more distant. In fact, it was reported recently by Halifax that house prices in March had the largest monthly gain since last August, with prices considerably higher than previously, 2.7% for that month compared to the 1.8% annual growth that was recorded in February. This means that even if you are a first-time buyer who is eligible for one of the Help to Buy Schemes available, you may still have trouble getting a mortgage as you will need around 5% of the house’s value, and if prices are increasing, this makes it harder to save up for this amount.
Yet, despite these depressing statistics, it is worth noting that mortgages without a deposit are not completely dead and gone. They may not be as common, with not as many lenders who providing them these days, but they do still exist. Here at Secured Loans, we look in further detail how this may be possible and the options that are available to you.
These are essentially the only kinds of mortgage that allow someone to be able to buy a home without requiring a deposit up front. They are also known as springboard or family mortgages. With this mortgage type, having a named guarantor means that you can still get on the property ladder.
Guarantor loans explained
With this type of mortgage, you will need to choose someone you trust and is financially stable to act as your guarantor. They are the reason that you will be able to get access to the mortgage, as the presence of the guarantor gives the lender confidence that in the event that you default in repayments, the guarantor will make the payments on your behalf
What does the guarantor do?
The person you would like to name as your guarantor to get one of these mortgages without a deposit must be comfortable with the idea that if you cant make repayments, they will have to pay on your behalf. This means that they will need to put down one of the following as security for you to be able to get access to a guarantor mortgage:
- Savings: this means that they may have to put a certain amount into a savings account which is then held by the lender for a number of years. It is usually once you have paid a specific amount of the mortgage before it is possible to be able to withdraw money from this account
- Property: the mortgage lender will most likely hold a charge on a property that the guarantor owns. This means that if for any reason payments have defaulted, the lender has the right to repossess your property should there be too many missed payments on file
Who are guarantor mortgages good for?
It may be the case that your application for a guarantor mortgage is accepted if you have a guarantor and:
- You are a first-time buyer
- You have a low income
- You have a low credit score
- You have only a small deposit
- You are looking to buy a home that is worth more than lenders think you are able to afford when it comes to taking out a mortgage.
Can anyone be a guarantor?
In the majority of cases, you have the choice of deciding who the guarantor is, and this may be a family member or a friend. However, with certain lenders, they may ask that the guarantor is specifically a parent, grandparent or step-parent.
Even if they do not specify who the person needs to be, they will most likely have to fit these criteria:
- Have a strong credit history, as the mortgage lender must be confident that the guarantor is financially stable
- Meet a certain level of income that is high enough to be able to cover your payments if for any reason you are unable to continue paying. This must be enough income that means that their own spending and mortgage repayments aren’t affected
- They must also own their property outright, or they must have enough equity in the property in order to meet the lender’s eligibility. Typically, this may mean that the guarantor will need to own at least 30%
- A large majority of lenders will also need to see that you have taken legal advice
Advantages of 100% mortgages
Let’s take a look at the pros and cons of 100% mortgages requiring no deposit looking at the advantages first:
- The obvious advantage is not having to find the money for a hefty deposit
- They may also benefit existing homeowners who have fallen into negative equity and they purchased their house in the boom years
- In the above scenario, this means that 100% mortgages may be able to help a homeowner remortgage a property when perhaps they would otherwise become a mortgage prisoner, trapped in a property that is unsuitable as well as having to pay high rates of interest
Disadvantages of 100% mortgages
If you are considering getting a 100% mortgage, it is important that you thoroughly understand the drawbacks involved too, as they have the potential to seriously impact both you and your guarantor’s finances.
- The guarantor must be willing to put up with the possibility of their savings being at risk and in the worst case scenario, losing all of the money that has been saved.
- They still very much remain a niche product on the market, meaning they can be difficult to get, with strict criteria
- The fees and charges are not as competitive and may be higher as a result
- There is also a negative equity risk involved too, which means that if the house price falls you could still end up paying for a mortgage that is higher than the actual valuation of your house.