Finding the money for a deposit on a property can be difficult, especially if you are a first-time buyer. This makes the idea of a no-deposit mortgage very appealing, as it could make it easier to get onto the property ladder.
However, there are lots of things to consider when it comes to taking out a no-deposit mortgage, so we explain how it works, what is required to apply and the main pros and cons you need to be aware of.
What is a no-deposit mortgage?
A no deposit mortgage is a loan that offers the full amount of the money required to buy a property. It is also referred to as a 100% loan to value (LTV) mortgage, as you do not need a deposit for this type of mortgage.
What are the requirements?
No-deposit mortgages are not commonly offered by lenders, although one did appear on the market earlier in 2023.
The requirements of a no-deposit mortgage are the same as any other type of mortgage, as you are more likely to be approved if you have a regular income, low debt levels and a good credit score.
The lender will also require you to offer details about your incomings and outgoings to demonstrate that you can afford to repay the mortgage in the long-term.
Having a guarantor could also benefit your application for a no-deposit mortgage, as it provides a financial back-up for your mortgage payments, should you fall into financial difficulties in the future.
What are the pros of a no-deposit mortgage?
The pros of a no-deposit mortgage are:
- You do not need a deposit for this type of mortgage. Finding the large sums of money required for a property deposit is usually one of the main reasons why people cannot get onto the property ladder.
- Having the opportunity to secure a no-deposit mortgage allows more people – especially first-time buyers – to get onto the property ladder. Not only is this good news for buyers but also for the wider economy, as when there are more buyers on the market, property prices tend to increase which boosts the local economy.
- Without the need to find money for a deposit, buyers can immediately start to build equity. If the value of the property grows, so too will the homeowner’s equity, which could also make it easier to secure loans in the future or to sell the property at a profit.
- The money saved on raising money for a deposit could allow homeowners to invest more money into their pension and retirement plans, pay off existing debt, or set aside emergency funds. Overall, a no-deposit mortgage can allow buyers to enjoy greater financial flexibility and stability in the long term.
What are the cons of a no-deposit mortgage?
It is also important to be aware of the cons of a no-mortgage deposit, which include:
- With a no-deposit mortgage you will have to pay a higher interest rate than a traditional mortgage. This is because the loan poses more risk for the lender, as the buyer has no equity stake in the property. Compared to a traditional mortgage, the borrower will pay more in interest over the full course of the loan.
- The lending rules for taking out a no-deposit mortgage are stricter than usual, due to the higher risk being taken by the lender. This can make things more difficult for buyers, especially those entering the market for the first time, and for anyone with smaller incomes or lower credit scores.
- Another issue to be aware of with a no-deposit mortgage is that there are not many options currently on the market. As there are not as many lenders to choose from, it can be more difficult to secure a good deal that is affordable.
- If a buyer does manage to take out a no-deposit mortgage there is also an increased risk of negative equity. The buyer will have no equity in the property, so if it loses value, they will end up owing more than the property itself is worth, which can make it more difficult to sell.
How do I apply for a no-deposit mortgage?
You can apply for a no-deposit mortgage in the same way as any other type of mortgage. Look around on the market and compare to find the best deal to suit your financial situation and then make an application to the lender.
They will go through the usual process of assessing your finances and credit history to see if you are suitable for this type of mortgage. If you can secure a guarantor, this could also help your application.
As we mentioned above, lending rules tend to be stricter with no-deposit mortgages, so whilst you may be able to meet the mortgage requirements of a traditional mortgage, this may not be the case with a no-deposit option.