Buying a home is a significant financial step, and for many prospective homeowners in the UK, the deposit requirement can be one of the biggest hurdles. Traditional mortgages typically require a deposit worth at least 5% to 10% of the property value. However, in recent times, there has been growing interest around what’s known as a 0 deposit mortgage – sometimes referred to as a no deposit mortgage or zero deposit mortgage.
This article aims to explain what a 0% deposit mortgage is, how it works, the eligibility criteria, pros and cons, and what to consider if you’re thinking about applying for one. If you’re looking for insights on how to begin your journey towards buying a home without a deposit, this guide should help you understand the essentials and what to expect.
What is a 0% Deposit Mortgage?
A 0 deposit mortgage is a type of home loan where the borrower does not need to provide any upfront deposit to secure the mortgage. In other words, the entire property value is covered by the mortgage loan. This contrasts with more traditional mortgage products, where applicants must typically provide at least a 5% deposit to secure funding.
These types of loans are particularly appealing to first-time buyers or renters who have a good income and credit history but have not managed to save for a deposit.
How Does a 0% Deposit Mortgage Work?
A zero deposit mortgage essentially offers 100% loan-to-value (LTV), meaning the mortgage covers the full price of the property. However, because lenders take on greater risk by issuing these products, the eligibility criteria are often more stringent.
Some types of 0 deposit mortgages are supported by family members or guarantors. For example:
- Guarantor Mortgages: A family member guarantees the mortgage repayments, usually by securing their own savings or property as collateral.
- Family Link Mortgages: A parent or relative might place savings into a linked account as security for the loan, which can be returned after a certain period if conditions are met.
Some lenders may offer 0 deposit mortgages without a guarantor, particularly if the borrower can demonstrate strong affordability an
d financial discipline. These products are less common and may involve higher interest rates, tighter lending conditions, or both.
Who Can Apply for a 0% Deposit Mortgage?
Eligibility for a no deposit mortgage can vary by lender, but common requirements include:
- Excellent Credit History: Lenders want reassurance that you have a record of repaying credit responsibly.
- Stable Income: Proof of consistent income and employment is vital to demonstrate that repayments are affordable.
- Affordability Assessment: Lenders will assess your income, outgoings, and spending habits to calculate whether the mortgage is manageable.
- Rental Payment History: Some lenders may ask to see at least 12 months of on-time rent payments, suggesting you can manage a similar monthly mortgage repayment.
Why Are 0% Deposit Mortgages Gaining Popularity?
House prices have risen significantly over recent decades, far outpacing wage growth. For many, this has made saving for even a 5% deposit increasingly difficult. At the same time, rising rent costs make it harder for renters to save for a deposit while maintaining other financial commitments.
In this environment, a 0 deposit mortgage can offer an alternative route onto the property ladder, allowing individuals to buy without waiting years to save a deposit.
The Role of a Family Member or Guarantor
In many cases, a zero deposit mortgage may require the support of a family member, either as a guarantor or by contributing savings:
- Guarantor Mortgages: A guarantor agrees to cover the payments if the borrower fails to do so. This reduces the lender’s risk and makes it more likely your application will be approved.
- Savings Secured Mortgages: Some lenders require a family member to place a sum of money into a linked savings account. This acts as security and is usually locked for a number of years or until a certain amount of the mortgage is repaid.
These options allow lenders to offer higher LTVs with a safety net in place, making them viable for individuals without a deposit.
Different Types of 0% Deposit Mortgages
There’s no single type of no deposit mortgage. Here are some of the most common categories:
Guarantor Mortgages
These rely on a family member’s income or assets. If you fail to pay, your guarantor may be required to cover the repayments, or, in some cases, risk losing secured collateral.
Family Springboard Mortgages
These require a family member to place money into a savings account linked to your mortgage. Provided you make payments as agreed, the savings are returned with interest after an agreed term.
Professional or Key Worker Mortgages
Some lenders offer schemes with favourable terms for professionals such as teachers, nurses, or other public sector employees. Depending on the lender, these may not require a deposit and may have discounts or flexible criteria.
Shared Ownership and Help to Buy (Historic Schemes)
While not strictly 0 deposit mortgages, government-backed schemes like Shared Ownership or the former Help to Buy equity loans allowed buyers to own a portion of the property while paying rent on the remaining value, reducing the upfront cost. These schemes often required low deposits and are sometimes confused with full 100% LTV mortgages.
Advantages of a 0% Deposit Mortgage
Choosing a zero deposit mortgage can present several advantages, particularly for first-time buyers or those struggling to save:
- Faster Access to Home Ownership: You can buy a property without waiting years to build up a deposit.
- Stop Paying Rent: Monthly mortgage repayments may be similar to, or even less than, rent payments in some areas.
- Support for First-Time Buyers: With the support of a guarantor or family member, it may be possible to enter the housing market earlier.
Disadvantages and Risks of No Deposit Mortgages
Just as a 0 deposit mortgage can offer benefits, there are also important risks and considerations you should be aware of:
- Negative Equity: With no deposit, you’re borrowing the full property value. If property prices fall, you may owe more than your home is worth, making it difficult to sell or remortgage.
- Higher Interest Rates: These mortgages often come with a higher interest rate than mortgages with a deposit.
- Stricter Lending Criteria: Approval may be more difficult if your income or credit history doesn’t meet the lender’s requirements.
- Family Involvement Risks: If a family member acts as a guarantor or provides savings for a springboard mortgage, their finances could be at risk if repayments are missed.
Factors to Consider Before Applying
Before considering a zero deposit mortgage, it’s important to think about the following:
Affordability
Will you be able to comfortably afford monthly repayments, even if interest rates rise? Lenders typically carry out stress tests to ensure you can cope with higher rates, but it’s worth doing your own budgeting too.
Long-Term Plans
Do you plan to stay in the property for a few years? Selling a property that’s in negative equity can be complex and expensive – making long-term residence more practical with a 0 deposit mortgage.
Financial Stability
Is your income and job situation stable enough to take on a full mortgage without the cushion of equity? Mortgage arrears can have serious consequences, including repossession and credit damage.
Family Support
Is a family member willing and financially stable enough to support you as a guarantor or deposit backer? They must also understand the commitments involved.
Alternatives to 0 Deposit Mortgages
If a 0 deposit mortgage isn’t suitable, there may be other routes to homeownership to consider:
Low Deposit Mortgages
Some lenders offer mortgages from as little as a 5% deposit, which can open more options without the higher risks of zero deposit borrowing.
Shared Ownership
This scheme allows you to buy a share of a property and rent the rest. Over time, you may be able to increase your ownership stake through a process called staircasing.
Lifetime ISAs
This savings account allows individuals aged 18 to 39 to save towards their first home, with a 25% government bonus on contributions of up to £4,000 per year.
Gifted Deposits
Sometimes family members can gift part or all of a deposit to help with a traditional mortgage. This can make it easier to get a better rate and avoid higher LTV borrowing.
Frequently Asked Questions
Are 0 deposit mortgages risky?
They carry more risk than traditional mortgages, mainly due to the possibility of negative equity. If property prices fall, you may end up owing more than your property is worth. This can complicate remortgaging or selling your home in the future.
Can first-time buyers get a no deposit mortgage?
Yes, some products are available to first-time buyers, especially those with a good credit history and stable income. Some lenders may ask for proof of rental payments to demonstrate affordability.
Do I need a family member to get a no deposit mortgage?
In most cases, yes. Many lenders require a guarantor or family savings support for 0 deposit mortgages, although a few may offer standalone products with stricter eligibility conditions.
What credit score is needed for a zero deposit mortgage?
Lenders typically look for an excellent or good credit history. Each lender has its own criteria, but missed payments, defaults, or high levels of debt may reduce eligibility.
Can I remortgage if I took out a 0 deposit mortgage?
Yes, although your ability to remortgage will depend on the property’s current value, your repayment history, and your financial circumstances. If you’re in negative equity, remortgaging may be more difficult.
Conclusion
A 0 deposit mortgage can offer a route onto the property ladder for those who can afford monthly repayments but can’t raise a deposit. However, it’s important to weigh the benefits against the risks, such as potential negative equity and higher interest rates. Each lender will have different criteria, and not all applicants will be eligible for this type of mortgage.
As mortgage brokers, we can help you explore your options and guide you through what’s available, including whether a no deposit mortgage may be suitable for your circumstances. Understanding how it works and what’s required can give you a better starting point as you start your home-buying journey.