The biggest challenge facing many first time buyers & home movers is having a suitable deposit in place to allow them to purchase the property of choice. Here we discuss the challenges faced and alternative options available.
Is a No Deposit Mortgage Possible?
At the time of writing this in Sept 2020, given the current climate, and what is happening with the pandemic, many lenders are not lending at 100% of the purchase price, so therefore you will need to put down a deposit of typically 10%-15%, however there are alternative finance options available where a 0% deposit mortgage could well be possible.
What types of mortgages are there where a mortgage is available with no deposit?
Shared Ownership Mortgages – This is where you purchase a share of the property and rent the remaining share from the housing authority. For example if a house was for sale at £400,000, you could buy a 50% share being £200,000 and then pay rent on the remaining 50% (£200,000). On the share you are buying traditional high street banks will require you to put down a 5%-15% deposit, however there is a specialist lender who will currently allow you to borrow a 100% mortgage of the share you wish to purchase.
Family & Friends Help – There are 0% deposit mortgages available with the likes of the Barclays Family Springboard mortgage where a family member or friend can deposit 10% of the property purchase price into a Barclays account as security for the mortgage. The family member/friend will earn interest on these savings. For example if a property is worth £200,000 the 10% contribution from the helper would be £20,000 and this would need to be held in a Barclays account for a minimum of 5 years, unless the property is sold or remortgaged having built up sufficient equity.
General Ways You Can Repay a Mortgage
There are 3 ways in which you can take out a mortgage:
Repayment mortgages are the most popular and mean each monthly payment chips away at the total mortgage amount, including the original sum plus interest. At the end of the mortgage term the debt will have been paid off.
Interest-only mortgages are when you only pay the interest on the mortgage during the term, then make a one-off payment at the end of the mortgage term to pay off the original sum, many lenders are wary to lend on an interest-only basis. The main concern for lenders and advisers is the repayment method that you have in place to repay the capital – it has to be feasible and not make any assumptions.
Part Repayment and Part Interest Only maybe suitable in some situations. Again it is extremely important that there is a clear repayment method to clear the interest only element of the mortgage.
Please note: if you take out a 100% mortgage the only repayment method available is on a capital and interest basis known as a ‘Repayment’ mortgage.
Types of Mortgage Rates
You can also choose between different interest types:
Fixed-rate: means the interest rate that you pay at stays the same for a certain period of time, usually a period of 2 years or 5 years for example. After this initial period your rate will typically change to a variable rate.
Variable-rate: With this, the interest rate can change when the lender decides to change it. This means it can go up or down, depending on economic conditions.
Tracker: Interest rates can also change, but they’re normally attached to another interest rate – usually, but not always, the Bank of England base rate, for example.
How much could I borrow?
The amount you’ll be able to borrow will depend on any current debts you may have, also other outgoings, overall affordability and also your credit score.
Generally they will usually lend around 4.5x your annual salary. However they will factor in all outgoings which could impact your borrowing potential, such as any child care costs that you may have, costs for utility bills, any future expenditure you are likely to have will also be taken into account plus any debts you have. If you receive extra income such as overtime, bonuses, shift work for example, this income can be included and lenders will maybe use 50% of this income if it is regular, however if it is a guaranteed extra income some lenders may use 100% of it.
Lenders and advisers need to ensure that you can afford to repay the loan now and in the future. There are mortgage calculators online, that you can use to see how much you may be able to borrow, however the best way to confirm how much you can borrow is to speak with a mortgage broker.
How long can I borrow for?
Mortgages come in different terms, ranging from five years to 40 years, but it’s very common to see mortgages last for 25 years. In fact, the most popular mortgage term for first-time buyers is between 21 and 30 years.
However, a longer mortgage term may allow you more flexibility. Long-term mortgages generally mean you’ll pay less each month (but more long term), and if your mortgage deal allows you to make overpayments, it could work to your advantage. For example, you’ll be able to overpay when you can afford to, cutting down the mortgage term as well as you do and if things get tight financially for you, you can go back to your normal monthly payments.
What costs are payable on 0 deposit mortgages?
These are the typical fees payable when buying a property and this will be the same whether you put down no deposit or you put down 50% deposit.
Lender Arrangement fees – These can vary from lender to lender. You generally have the option to pay these separately or add to the loan. Please note if you add them to the loan you may be charged interest for doing so.
Broker fees – These maybe payable at different stages when arranging the mortgage. Your adviser should clearly outline what is payable and when.
Valuation fees – These are paid upfront and the cost of this varies depending upon the value of the property you wish to purchase. There are 3 types of valuation that you may want to get done, Mortgage Valuation, Homebuyer Survey or a Full Structural Survey – the type of valuation that you get done will have an impact on the cost.
Legal fees – You will need a conveyancer to represent you and there cost will generally be paid in 2 parts, some upfront and some on completion.
What documents will I need to provide for a UK mortgage?
Lenders typically require:
Proof of Identity documents – such Passport and or Driving Licence – make sure they are valid and the address is correct on the driving licence.
Proof of Income – If you are employed this is your last 3 months payslips and P60 or if you are Self Employed this is your last 2 years tax calculations and tax overviews.
Bank statements – We would require your last 3 months bank statements to understand your expenditure.
Would you like to discuss how the 100% mortgages mentioned above work?
We have specialist advisers who arrange shared ownership and family mortgages that would be happy to provide you with mortgage advice. You can call us directly or complete the enquiry form where you will be able to schedule a telephone appointment call to explore your options.
Yes – There are two ways in which this can be achieved through the shared ownership scheme where a lender could provide a 100% mortgage of the share you wish to purchase or a family assisted mortgage where a family member or friend provides savings equal to 10% of the purchase price to be used as security to the lender which is held in a savings account.
Several high street banks offer 100% mortgages providing family or friends can deposit 10% of the purchase price into a savings account with the lender. If you are looking at a shared ownership properties there is a specialist lender that will provide a mortgage to allow you to borrow 100% of the share you wish to purchase.