When the cost of living is growing faster than the average salary, saving up a mortgage deposit can be a difficult task, especially when house prices continue to rise.
The latest data shows the average UK property costs around £231,000, which means for a 10% deposit, you’ll need to save a minimum £23,000. With rent and living costs continually on the up, saving that amount might seem near-impossible.
Don’t panic! You’re not alone and there are plenty of options available if you really want to get on the housing ladder soon:
- Family offset mortgages
- 100%* guarantor mortgages
- New-build developer loans
- Help to Buy schemes
* The percentages here refers to the loan to value (LTV) of a property. That is, the amount you need to borrow vs. the amount you’ve saved as a deposit. In this instance, without a deposit, you’d need to borrow 100% of the property’s value.
Before the financial crisis, countless lenders offered 100% LTV mortgages so borrowers needn’t have saved a penny in order to purchase a property. Since then, lenders have got wise and very, very few allow them, especially to first-time buyers. This is because the risk to them of not being able to recoup the money is very high.
However, some new mortgage products enable you to get a mortgage without paying a deposit – but you’ll need backing from a close family member. These are known as family offset mortgages.
What is a family offset mortgage?
A family offset mortgage is almost identical to a traditional offset mortgage, but rather than having your own savings linked to your mortgage, you use those of a close relative. In other words, you use their savings to “offset” your mortgage debt.
For example, you want to buy a £200,000 property but do not have a deposit or substantial savings. Your mother, however, has £30,000 in savings. Providing she holds that money with the same lender you want to borrow from in a linked account, you can reduce the amount you need to borrow by £30,000, meaning you’ll only need to borrow £170,000 to buy the property. That gives you an 85% LTV and far better rates than if you’d only just managed to scrape together a 5% deposit.
Not all lenders offer these types of mortgage, and of those that do, the family member must be immediate family – a long lost cousin twice removed won’t suffice.
Which lenders do family offset mortgages?
- Barclays offers a “Family Springboard” mortgage which allows you to buy a property without a deposit if a family member can provide 10% of the property’s price as a deposit. The family member must open a Helpful Start account and deposit 10% of the property’s purchase price. If you make all of your mortgage repayments on time, your family member will get the money back with interest on top after three years. They are not classed as a guarantor but Barclays can keep some of their money after three years if you miss any payments.
- The Post Office has a “Family Link” mortgage where you can get a 90% mortgage with a 10% loan secured against a family member’s home as long they own it outright. The 90% mortgage is charged at 4.98% for five years, which isn’t cheap in the current market, but the remaining 10% loan is interest-free.
- Aldermore Bank has a “Family Guarantee Mortgage” which allows you to borrow 100% of the mortgage but Aldermore uses your parents’ property to guarantee 25% of the loan. Other smaller lenders like Tipton and Loughborough have similar options.
Now read: What’s the max mortgage you can afford?
What is a 100% LTV guarantor mortgage?
Guarantor mortgages are similar to family offset mortgages in that they require a close family member to offer something of theirs to your lender to reduce your loan. In this instance, it’s either their own home (which they’ll most likely need to own outright) or savings to be used as security on your mortgage.
Your guarantor will need to sign a legal agreement saying that they will pay your mortgage if you can’t meet the repayments yourself. Parents or other close relatives are the most common type of guarantor.
The old style of guarantor mortgage didn’t require the guarantor to be named on the title deeds, but with the new wave of guarantor mortgages, many lenders prefer them to be a joint applicant.
Using the guarantor’s own home or savings as security on your mortgage loan means their home could be repossessed if you miss too many repayments. Alternatively, if using their savings as the guarantee, they’ll need to lock them away in a linked savings account, which they cannot access for an agreed length of time or until the mortgage is repaid. However, they may be able to earn interest on those savings.
There are restrictions on who can be a guarantor. Some lenders limit it to parents, grandparents or stepparents – and they’ll need to have enough equity in their own property and/or a certain amount of income to satisfy the lender’s rules. They’ll also need a good credit history.
If you don’t have anyone to help you, there are other ways to buy a property without a deposit.
Help to Buy schemes
There are a number of government schemes that allow you to purchase a property (or a share of one) with a very small deposit.
The Help to Buy: Shared Ownership scheme allows you to buy between 25% and 75% of a property and pay rent on the rest. Over time you can acquire a larger share in the property at the current market rate. In doing so, more of your monthly payments will be going towards the mortgage itself and less on rent.
If you’re only looking to buy 25% of the property to begin with, you’ll need a much smaller deposit than if you were buying the whole thing.
For example, a 25% share of a £140,000 flat is £35,000. If you were to opt for a 95% LTV mortgage, you’d only need to raise a deposit of £1,750.
Another option is the Help to Buy: Equity Loan scheme, where the government loans you up to 20% (40% in London) towards your deposit, interest free for five years. You’ll need at least a 5% deposit in order to be eligible.
New build developer loan
These are quite rare but some property developers will offer you a loan for the deposit when you agree to buy one of their new-build homes.
For instance, they might lend you a deposit of 20% on the condition that you repay it within 10 years. This may help you to get better rates on the remaining 80% LTV mortgage but you need to ensure that you can make the mortgage repayments and the loan repayments at the same time.
Now read our guide on the complete costs of buying a home
What are the risks of getting a mortgage without a deposit?
The main problem with 100% mortgages is that the product fees and interest rates tend to be higher than if you were able to put down a deposit.
The bigger the deposit, the lower the rates and the more affordable the mortgage becomes.
Lenders can make you pay a higher lending charge – a fee for borrowing with a small deposit – which gives them additional protection in case you miss payments or you fall into negative equity.
Negative equity is where the value of your property drops so it’s worth less than your outstanding mortgage debt. For example, you bought a house for £200,000 and still owe £160,000, but the house is now only worth £140,000. If the value of the property dropped to £170,000 (which is less that what you paid but more than the outstanding debt to the lender), you would not be in negative equity.
There are many problems with being in negative equity and most come to the fore when trying to sell or remortgage. Very few lenders will allow you to switch deals if you’re in negative equity, which means you’ll likely languish on the lender’s standard variable rate (SVR), which is often high. As a result, your monthly payments will increase regardless of the fact your property is worth less.
As we’ve said above, guarantor mortgages are risky for the guarantor: if you fall behind on your monthly repayments, your guarantor must pay the lender instead – or alternatively have their savings taken or home repossessed.
Now read our guide on how to get your first mortgage
Edited by: Sarah Guershon