No deposit mortgages on the rise: The options available
Pulling together a deposit is often one of the biggest challenges for first-time buyers. If it’s a difficulty you or a loved one is facing, you may be pleased to hear that the number of ‘no deposit’ mortgages is growing.
Research from Post Office Money suggests that one in ten first homes are now purchased without a traditionally saved deposit. The figure rises even further in London to 14%. High rents, rising property prices and low wage growth have left many first-time buyers struggling to save enough to place the typical 5-10% of the property’s value down as a deposit. In fact, the report indicates that just 27% of first-time buyers manage to raise the full deposit required on their own.
Being able to access a no deposit mortgage or support from family can make the property market more accessible and help you take a step on the property ladder sooner than expected. So, what are your options?
A gift or loan from family
Accepting a gift or loan from loved ones is becoming an increasingly common way to get over the obstacle of raising a deposit.
According to research from Legal and General, the Bank of Mum and Dad is expected to lend almost £6 billion over the course of 2018 alone. Parents and grandparents will be supporting 27% of first-time buyers. The average amount lent for a deposit is £18,000, providing a helping hand for the next generation of homeowners.
One of the most important things to do if this is an option for you is to have a conversation about whether it’s a gift or a loan. Clearly, taking the money as a loan will impact on your outgoings once you’ve purchased a house and this should be factored into your budget.
It’s advisable for both parties to seek advice before going ahead with either a gift or loan. As it’s a deposit for a house, it’s typically large sums of money that are being transferred. Seeking advice and making the agreement formal can help ensure everyone is on the same page.
Before the financial crisis in 2008, 100% mortgages were fairly common. And they’re now starting to rise in popularity again.
A 100% mortgage allows you to borrow the full value of the property. As a result, no deposit is needed. If you want to step on to the ladder quickly, it can be an attractive option. However, there are some things to consider here. The interest you’re offered is likely to be higher than if you put down a deposit. This, in turn, means your monthly outgoings will be higher and you’ll pay more over the full term of the mortgage.
One of the key risks with a 100% mortgage is negative equity. Should the value of your property decrease, you will still owe your mortgage lender the amount you originally borrowed. As you pay off more of your mortgage, negative equity becomes less of a concern. Historically, house prices have increased over the long term. But there have been dips in the market, which may affect you if you want to move quickly.
There are a few different types of family mortgages available that can help you buy a home without needing to save a deposit.
One option to consider is a family deposit mortgage. This is where a family member places the sum you’d normally put down as a deposit into a savings account with the mortgage lender. The money is held securely, earning interest, for a set period of time. As long, as you meet mortgage payments, the money is released back to your family member once the fixed period is up.
This is a good option if you have family that have a lump sum now but will need it in the future, for instance, to fund retirement. As they’ll still earn interest, it can be a more attractive option then simply loaning you the cash. However, if you don’t meet your mortgage obligations there is a risk that they will lose their money.
Other family mortgage options to look into include a family offset mortgage, which can reduce your repayments, or a family link mortgage, which will include a loan secured against your family member’s home.
A guarantor mortgage, as the name suggests, is where a family member acts as your guarantor. This can allow you to borrow 100% of the property’s value, with your family being responsible for covering any costs you can’t meet. Usually, the guarantor will need to own their home and have a regular income to be approved.
This may be the right option for you if your family want to help but don’t have the cash assets to cover a deposit. However, it is an option that does come with some risks for the guarantor. If, for example, you stopped making mortgage repayments and your home was repossessed, your guarantor would be expected to cover any shortfall.
If you’d like advice on the type of mortgage that is best suited to you, whether you have a deposit or not, please contact us. We’ll give you access to a full range of lenders, including many that aren’t on the high street, to improve your chances of securing the deal you want.
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