No Deposit Mortgage: What is it and How Does it Work?
- Most no-deposit mortgages require a 'helper' to put up some funds as collateral, but they get this back.
- There are mortgage products designed for people who don't have a helper to do this.
- No-deposit mortgages are also known as Family Mortgages, Springboard Mortgages, Offset Mortgages, or 100% LTV mortgages.
What is a no-deposit mortgage?
You can buy a home using a no-deposit mortgage where the deposit is offset by a helper, which could be a family member or close friend for example, placing a sum equivalent to your deposit into a linked account.
This type of mortgage is often called a family mortgage or a springboard mortgage, both are mortgages with no deposit from the buyer. The helper does not get legal or beneficial rights over the property.
That sum must remain in the account (one set up for the purpose by the lender), untouched but interest-bearing, for a period, normally a minimum of 3 years.
It is effectively a 100% mortgage from your perspective as a borrower. A lender offering this kind of mortgage product will only make you a mortgage offer if you can prove that you have a 'good risk' of being able to make the appropriate monthly mortgage repayments.
NB You normally have the option to fund some of the deposit yourself and this would not only reduce the sum your helper has to provide but also means repayments and rates for your mortgage will be less, saving you money in the long run.
How can I get a mortgage with no deposit?
SAM's expert panel of brokers can help find you a suitable mortgage product with no deposit.
What if I don't have a family member who can offset my deposit?
As a zero deposit mortgage first-time buyer, there aren't many high street lenders offering products unless you have the help of someone else.
There are however more bespoke lenders such as Proportunity, who offer zero deposit mortgages. The loan that they provide is interest only and the capital amount doesn't have to be repaid until the sale of the property.
This scheme relies on property prices rising over time and poses a much-increased risk of negative equity if the market dips.
The lender aims to mitigate against this risk with their Proportunity Home Index (PHI) which identifies over and undervalued properties based on over 150 data points.
Even if this index is 100% reliable, it may be unable to protect buyers from an economic downturn or crash.
If you are considering a zero-deposit mortgage, SAM suggests you speak to an independent mortgage advisor to compare your options.
Negative equity
One significant risk associated with homeownership, particularly with 100% mortgages, is negative equity. If property prices decline, the value of your home may fall below the amount you owe on your mortgage. This could happen due to various factors such as a declining property market or economic downturn.
To mitigate this risk, consider strategies such as overpaying your mortgage to reduce the outstanding balance or making home improvements to increase the property's value.
Above all else, only get a mortgage you are comfortable paying. If property prices increase and you find yourself in negative equity, sit tight and keep paying your mortgage as it's likely prices will recover.
What are the main selling points of a no-deposit offset mortgage?
- As a buyer, you can purchase a home without having saved for a deposit, making it particularly attractive to young people in general, who won't have had years to save.
- As a helper, you might get a respectable rate of interest for locking your savings up for a minimum of 3 years when compared to other fixed-rate savings accounts.
Who is a no-deposit offset mortgage suitable for?
Any first-time buyer or home mover who can make the monthly mortgage repayments and, even though they cannot offer a 10% deposit, has a helper who can deposit the same amount of money for the minimum 3-year period.
Your helper could be any of these:
- Mum and Dad.
- Other family member.
- Friend.
- Investor.
- Adopted parents.
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How does a no-deposit offset mortgage work?
Instead of the buyer (you) providing the 10% deposit, a helper (family member or friend) opens up a linked account with the mortgage lender, and they place a sum in the account equivalent to the deposit amount.
They then cannot access the funds for a set time period, normally 3 years. When this period passes, they can draw out the money along with the interest that the sum attracted over the period.
You will still have to pay valuation fees and early repayment charges like a regular mortgage and it will have a similar maximum term of around 25 years (depending on your age). As a niche product, you may find that interest rates are higher.
Your helper is not acting as guarantor, if they have sufficient funds to put a separate chunk into another person's family mortgage, they can with the lender's approval.
What happens if you can't pay?
Circumstances might mean that you miss a month's repayment but if you fail to make a number of these, perhaps 3 or more, then the lender can retain the funds in the linked account until your mortgage account is up to date.
For the funds to be released to your helper, you are often also required to ensure that you don't miss any payments in the 12 months preceding the release date and possibly no more than 2 in the previous 36 months. If you don't, the lender will continue to hold onto the helper's funds for a longer period.
If the worst comes to the worst and your property is repossessed, the lender uses the funds in the linked account to clear any losses on the sale of the property.
Alternative ownership options
The mortgage guarantee scheme
This scheme allows first-time buyers the opportunity to purchase a property with a smaller deposit (5%). However, it's important to note that the scheme is set to end in June 2025.
This can be advantageous for buyers who may struggle to save a traditional 10% or 20% deposit. However, they need to be aware that mortgages under this scheme often come with higher interest rates compared to standard mortgages.
Shared Ownership
With Shared Ownership, you buy a share of a property, usually between 25% and 75%, while the remaining shares are owned by a housing association or another registered provider.
As you save, you can staircase your ownership share. This flexible approach can be attractive to first-time buyers who may struggle to afford a full-market purchase.
Joint mortgages
A joint mortgage is a viable option for couples, friends, or family members who wish to purchase a property together. By combining incomes, joint borrowers may be able to secure a larger mortgage than they could individually.
Both borrowers are jointly liable for the debt, so if one borrower defaults, the other is responsible for the entire outstanding balance.
It might be worth drafting a Deed of Trust for each owner to set out their intentions for the property.
Joint Borrower Sole Proprietor
This is where an applicant can get help from a loved one for a mortgage. The second borrower will share the mortgage payment responsibility but won't be a registered owner on the legal title.
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Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
