Zero Deposit Mortgages

Zero deposit mortgages, as the name suggests, do not require the buyer to provide any down-payment, and the amount lent is therefore the full value of the property being purchased (hence these are also commonly referred to as 100% mortgages).

Not requiring any form of deposit makes this type of mortgage particularly suitable for first-time buyers, as they will likely not have enough savings to cover the normal five to ten percent deposit needed for other mortgage types. It is not limited to those looking to get their foot on the first rung of the property ladder however, and with the high house prices we currently have, even a just five percent deposit can prove a stretch for many.

Lenders tend to be more selective when offering zero deposit mortgages, as the property against which they are secured will not have any ‘spare’ equity in it, and so this does not leave any margin to cover the expenses involved in repossessing and selling on the property should the borrower default on the repayments early in the mortgage term.

A good credit rating is therefore needed to secure a 100% mortgage, and those with a poor credit history are very unlikely to be accepted by a lender for such a mortgage. This is not to say that they are hard to get, just that any borrower would need to be able to show that they will be able to afford the mortgage repayments, and that they have a secure source of income.

Zero deposit mortgages have been increasing in popularity in recent years, thanks in no small part to the continued rise in house prices relative to people’s earnings. As property has become more expensive, people have found it more and more of a struggle to find the necessary money to put down as a deposit on a house – this is especially true for first time buyers.

By eliminating the need for a deposit, these mortgages open up the market to more buyers, those who are able to afford the repayments on such a loan, but who do not have the savings required for the traditional five to ten percent down payment required by other mortgage types.

There are many positives that come from a zero deposit mortgage, however there is one less positive aspect that is worth noting – if the market slumps it is very easy to fall into negative equity as a result. Negative equity is where the current market value of the property is less than the mortgage owed on it – with a 100% mortgage even a slight drop in prices can result in this.

Whether or not this is an issue will depend on the owner’s circumstances – obviously if they are looking to sell then negative equity means they will have to pay the shortfall themselves in order to move on. Another knock-on effect is that it can affect further borrowing – a secured loan for example wouldn’t be possible, as there is no equity in the property to secure it against.

When looking to take out a zero deposit mortgage, any borrower should be sure that it is right for their needs, that they can afford to meet the repayments, and that they are comfortable taking on a debt that is 100% of the property’s current value. For a great many UK buyers, zero deposit mortgages are a real help, allowing them to buy the property that they want, without having to struggle to get a deposit together.