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.
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.
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.
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.
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.
My biggest concern was finding a mortgage with no strings attached. My options were clearly explained to me and I felt confident about the decision. Alice Silverman, Stoke-on-Trent
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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
IF YOU ARE THINKING OF CONSOLIDATION EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY.
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