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Low Deposit Mortgages

Mortgages where the borrower wishes to loan 90-100% of the money needed to purchase a property are becoming increasingly rare.

Find out why these mortgages are slowly becoming phased-out of the mortgage market and, if you are looking to get one of these mortgages, where you may possibly find a lender.

What is a Low Deposit Mortgage?

A low deposit mortgage is where the borrower seeks to borrow more than 90% of the money needed to purchase a property.  They may have little or no savings put by for a deposit.  

These mortgages have become rare since the 2007 financial crash, this is because they pose a high risk to mortgage lenders. With mortgages where the amount borrowed to buy a house is closer to 100%, the easier it is for the mortgage holder to fall into negative equity. If, for instance, there was a sudden downturn in the housing market, you could end up owing the lender more money than what your house is worth. If you then decided to sell, you would need to cover the mortgage shortfall, which could potentially put you in a lot of financial trouble.

See more in this Guide to Negative Equity for tips on making up mortgage shortfalls.

For the few lenders who do offer no-deposit mortgages, the interest rates charged for this loan may be considerably higher than other mortgage types. This is to counteract the risk these mortgages pose to lenders.

95% Loan to Value mortgages, on the other hand, are slightly more common. A small deposit of 5% can be used to successfully secure a mortgage. However, your application would still pose a significant risk to lenders.

Am I Eligible for a Low Deposit Mortgage?

• You will more than likely need at least 5-10% deposit for a home purchase before applying for a mortgage.
• You will need to pass a lender’s affordability assessment of your monthly income and expenditures. With low deposit mortgages, the income threshold may be much higher than mortgages where the loan to value ratio is lower. 
• You will need a good credit score and good history of making bill and credit card payments on time. Take a look at our Guide to Improving your Credit Rating, for more on this.  
• You will need to have the legal right to work and live in the UK.  Applicants should also be over 18 years old.

How is a Low Deposit Mortgage Repaid?

With mortgages where a low deposit is secured, you will more than likely have to take a repayment mortgage. This is where your monthly mortgage payments pay back a portion of the capital every month, as well as the interest cost of your loan. Over time, your equity in the home will start to build up. This means that in a few years you may be able to remortgage for a lower loan to value ratio. In doing this, you may be able to reduce the amount of interest you pay every month.

Take a look at our Guide to Remortgaging for more tips on switching deals/lenders.

If you have a small deposit at the start of your mortgage, you will have less choice available to you in how your interest payments are made. You may be able to find products where the interest is discounted for an introductory period. But, bear in mind that the interest rate charged will still be higher than if you applied for a mortgage with a higher deposit. See more information on mortgage interest rates in our Guide to Mortgage Types.

What are the Advantages of Low Deposit Mortgage?

• Make Home Ownership Possible – If you are lucky enough to secure a mortgage with a small deposit of under 10%, congratulations, you have made it onto the property ladder.
• Remortgage Later – Once you have secured your small deposit mortgage, with great money management (maybe an overpayment here and there too) you may be able to reapply for a new mortgage in a few years’ time. This could incur charges, but when it comes to your next mortgage application, you will be a more attractive candidate to lenders.

What are the Pitfalls of Low Deposit Mortgages?

• Less Choice – As you pose more of a risk of going into negative equity, the choice of products available to you may be very limited. Lenders would encourage you to save towards a higher deposit, although this is not always possible for everyone.
• Higher Interest Rates – The less you have available for a deposit, the more towards your mortgage you will owe. This means that your mortgage payments every month may be higher, your mortgage term may be longer and the total cost of your mortgage may also be greater.
• Negative Equity Risk – As mentioned previously, those on higher LTV mortgages are more at risk of falling into negative equity. If you do find that your mortgage capital is worth more than your home’s value, you can find ways to make up the difference, however, negative equity can cause huge problems if you are struggling to make your monthly repayments.
• Other Restrictions – Some lenders will only allow low deposit mortgages on new build properties or homes that have seen major renovation works in the last few years.

Let’s Look at a Low Deposit Mortgage Example;

Barry has a low deposit of 5% and is looking to buy a house. He sees one for £100,000 and needs a £95,000 loan. He has searched the market and found a good deal, the only condition is that he need to purchase a new build property in order to secure the mortgage. Barry looks on the new estate in his hometown and finds a house he likes. As he is in a hurry to move, he accepts the deal. He hopes that he can sell up and move in a few years, when he has built up some equity and the value of his home increases with the expansion of local facilities.

What are the Alternatives to Low Deposit Mortgages?

• Help to Buy – There are a number of government schemes designed to help homeowners raise a high enough deposit to secure a mortgage. You may choose to wait and save for longer, with the help of one of these initiatives.
• Joint Mortgages – See more in our Joint Mortgages Guide, but joining with another person can boost your deposit.
• Shared Ownership – Check out our Guide to Shared Ownership to see if you are eligible to buy a home on a part own, part rent basis. You can also choose to buy more of your home later, in shares.
• Guarantor Mortgages – If you have a family member or friend who can co-sign your mortgage contract you may be eligible for a guarantor mortgage, see how this works in our guide.
• Family Offset Mortgages – If you have a family member on a family offset mortgage plan, their savings could be used to put towards a deposit. If you are a first-time buyer, this may be a good option for you.

If you have a low deposit and wondering if your circumstances will allow you to take a mortgage, get in touch with an independent mortgage advisor. They offer free, no-obligation quotes and advice.