Most lenders and banks want a deposit to offer a mortgage to homebuyers. For lenders, this represents that the borrower is sensible enough to save money for repayment of the mortgage. However, there are rare mortgage offers where lenders can provide no deposit mortgage for a buyer. The mortgage, however, may or may not suitable for your needs.
Deposits not only increase your chances of getting approved for a mortgage, but a higher percentage of deposit also reduce the interest rate on the mortgage. With no deposit mortgage, it tends to have higher interest rate and some risks associated with it. The no deposit mortgage plan is often referred to as 100% mortgage as its Loan to Value (LTV) ratio is exactly 100%.
The Guarantor scheme
The current scheme that allows for 100% mortgage is the “Guarantor scheme”. According to this scheme, a parent, friend or a relative should use their home or their savings as a security with the lender. Moreover, the money has to stay there and cannot be withdrawn for at least 3 or more years depending on the requirement. The person who agrees to do the above is named as “guarantor” on your mortgage. Your income is also considered to calculate the amount you can obtain as a mortgage. If you are unable to pay the mortgage, the security or the house many be possessed as repayment of the mortgage.
Why no deposit mortgage?
The benefits of the no deposit mortgage is the obvious no initial deposit requirement. It is also beneficial if you assume the cost of housing is going to keep on rising. This growth will allow you to remortgage the property in the future to pay off the first mortgage faster.
The risk of this mortgage scheme lies in the unpredictable housing market. As the prices of the houses are falling, the valuation of your house subsequently fall as well. This decrease in value of your house puts you in negative equity. This is because the value of your property is less than the money you owe to the bank. This can stop you from moving houses and remortgaging to get a better mortgage deal. For banks, they will not be able to get full repayment of the mortgage as the price of the house below the initial valuation. Hence they charge higher interest rates for this kind of mortgage.
Banks like Barclays offer no deposit mortgage on 3 year guarantor scheme at 2.99% interest rate for first-time home buyers. Lenders like Aldermore, Vernon Building Society and others also offer no deposit mortgages with different interest rates and requirements to qualify.
It is quite clear that you need to consider the risks before going through with the no deposit mortgage offers. It can land you and your property in dismay if you are not careful enough. As the property market is in turmoil and there’s uncertainty hovering around the property market, it may not be wise to look for a no deposit mortgage plan. And there are plenty of mortgage offers with 5% initial deposits that don’t have similar risks involved.