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How to Buy a House With No Deposit

Natalie Wilson

May 17, 2024

What is a low deposit mortgage?

A low-deposit mortgage is exactly as it sounds – it’s a mortgage that requires a much lower deposit than usual for your lender to offer you a deal.

For example, a typical mortgage offer might require you to put down a minimum deposit that is equivalent to 15%-20% of your purchase property’s value. However, with a low deposit mortgage, this could be as little as 5%!

This allows you to buy property with a much lower deposit overall and means you could very well buy your first property sooner than expected.

Who is eligible for a low-deposit mortgage?

In the vast majority of cases, the only people who are eligible for a small deposit mortgage are first-time buyers, though current homeowners may be able to qualify for such a mortgage under certain circumstances.

This is because first-time buyers often have a much harder time securing the necessary deposit needed to purchase a home, particularly if they have been renting for a long period of time.

Current homeowners, on the other hand, typically have a sizable equity in their property (how much of their home they own compared to their remaining mortgage repayments), which is often large enough for them to put down the required deposit for their new purchase – but this is not always the case.

Things to consider when taking out a low-deposit mortgage?

While a small deposit mortgage can often be a lifeline to those in search of new property, there are a few important things to consider with this sort of mortgage, including but not limited to:

Higher rates

Small deposit mortgages are seen as far riskier offers by lenders than standard mortgages, so their associated interest rates are often much higher as a guarantee to lenders that they will recoup their money.

Larger payments

Although low deposit schemes require a smaller initial financial investment on your part, you’ll likely find that repayment costs are much higher than other mortgages due to the size of the loan and higher interest rates.

Negative equity

While all properties run the risk of falling victim to negative equity, low-deposit deals are particularly susceptible to this. This is because, if your property falls in value, you may wind up paying back a mortgage that is worth more than what your property is.

Low equity

This might not necessarily be a problem to begin with, however, a low deposit scheme does mean you’ll own a much smaller proportion of your property to begin with than other homeowners. Therefore, if you want to move early on in your mortgage deal, you will have very little equity to put towards your new purchase as a deposit.

Can I buy a house with no deposit?

Although it’s rather rare, it is possible to buy a house without a deposit. However, your no-deposit options will be fairly limited.

This is because most no-deposit schemes were scrapped after the 2007-2008 financial crisis, though certain lenders, such as the Skipton Building Society, have recently started to reintroduce them into the market.

In a similar manner to low-deposit options, no-deposit schemes are primarily designed for first-time buyers and people have been renting for a long time and have very limited opportunities to save for a deposit.

How to buy a house with no deposit

In order to qualify for buying a house without a deposit, every no-deposit scheme will require you to meet certain criteria.

For example, the Skipton Building Society no-deposit scheme requires applicants to be able to show that they’ve made consistent, on-time rental payments over the course of the last 12 months as well as for household bills.

On top of this, if you’re renting, then those applying for a no-deposit deal must be the exact same people. So, if it was just you making rental payments and not your partner, then only you would be eligible to apply for the no-deposit scheme – your partner would not be counted as eligible.

Things to consider when taking out a 100% mortgage?

On paper, buying a house without a deposit might seem like an excellent option as it lets you save all your money and buy your property at no cost to yourself outside of lending and conveyancing fees. But much like low deposit options, there are several important things to be aware of before you commit to this sort of agreement:

No Equity

While low-deposit options mean you own a much smaller proportion of your home’s equity, to begin with, zero-deposit schemes mean that, until you make your first mortgage payment, you will have zero equity for your property. And while your equity will increase as you pay your mortgage off, this be a slow process and may it take longer for you to increase any future home deposits.

Credit

In order to qualify for a no-deposit mortgage, it is essential that you have a good credit score and minimal debt. Otherwise, lenders may reject your application because they see you as too risky and unable to meet the required payments.

Very high interest rates

Due to the nature of no-deposit schemes and the risk they present to lenders, interest rates for these sorts of mortgages are incredibly high. As are the associated application and lending fees.

Negative equity

In the same manner as properties purchased under a low-deposit scheme, no-deposit mortgages are very susceptible to the effects of negative equity.

Are there any alternatives to buying a house without a deposit?

When it comes to those looking to buy a house with no deposit, alternatives to zero-deposit mortgages are exceptionally limited. However, you may be eligible for a guarantor mortgage.

With a guarantor mortgage, a family member or close friend is required to sign a mortgage offer with you, on the condition that they ‘guarantee’ that any missed payments will be covered by them should you be unable to meet any monthly fees.

However, as a guarantor, they will also be required to place either their own property or a set amount of their savings aside as security. Should they be unable to meet the payments as well, then these will be taken by the lender as payment.

So what should i do...

At the end of the day, whilst it is advisable to attempt to save for a larger deposit to keep interest rates and repayments lower. There are options out there for you if you’re unable to save enough of a deposit to move sooner rather than later. Alongside this, whatever your deposit circumstances, it’s always worth speaking to a mortgage advisor and broker. They can offer you expert advice and often get exclusive rates that aren’t available on the open market – and remember, if you choose to buy with Strata Home, you’ll get access to our recommended mortgage advisors free of charge!

For more information and tips on moving home, as well as mortgage rate insights, don’t forget to visit our blog for more insightful pieces like this one.