How to get a mortgage with low deposit
Published 16th August 2017
Property prices may well be back on the rise, due in the most part to increasing demand as potential home owners are being encouraged to buy now rather than save up huge deposits. As such, lenders are offering certain initiatives with and without the government, that help people buy with little or no deposit.
The different types of low deposit mortgage are outlined below:
5% deposit mortgages
For a while now, some select lenders have been offering mortgages to grade A credit customers with just 5% deposit. These products tend to be much higher rates than other deals around due to the increased risk to the lender. Now however, with the launch of the government scheme Help to Buy 2, other lenders have signed up to offer the same deal but at more competitive rates. See our Help to Buy page for more info.
Family member gifted deposit
Nearly all lenders accept these now, allowing a borrower to use a gift from a relative as form of deposit. It is normally a requirement for the borrower to have a signed letter from the giftor, to confirm they have no interest in the property and will not be making arrangements for or demanding the money be repaid (it must be a gift absolute).
Charge on family members property
Some lenders will use equity in other properties as security, so if you have family with a property that has enough equity available this could be an option for you to buy with no deposit at all. Typically these lenders won’t go over 90% LTV for the charge on the other property.
For instance, if your parents have a property valued at £200k and a mortgage of £100k, they could potentially take a charge for your deposit up to £50k. As with everything mortgages, the criteria of the lenders offering these types of product changes regularly, so check with us for the latest policy.
Charge on family members savings
This is sometimes referred to as a ‘springboard mortgage’ and is the same as taking a charge on a property, but taken over cash in the bank. Basically, a lender will have the depositor save in a secure account for a period of time (3 years with a lot of these currently) and use that to cover any shortfall if the property were to be repossessed and sold with negative equity.
Using unsecured borrowing
Despite popular belief and the fact that most lenders require you to have a deposit from a more reliable source (see acceptable sources of deposit table here), some lenders do allow you to borrow your deposit. So, taking a personal loan out or putting the debt on a credit card is not necessarily a bad option. You’ll need to find a lender willing to lend for that purpose on an unsecured basis however, but there are some out there that allow it. This has been a popular way of buying investment properties for renovators and those buying to sell quickly, where when the right property comes up they stick the deposit on a 0% credit card and then pay it off before the interest kicks in (you’ll need a decent credit limit however!).
Raising capital on other property
If you are buying with little or no deposit and already own property, it may be possible to withdraw some of the equity by either remortgaging or taking a second charge secured loan for the amount of deposit you require. Usually if the equity is there, a remortgage works out cheapest, but it’s not always the best option. For help on this read our article secured loans Vs remortgages.
A concessionary purchase is when someone buys a property at a discount from the true market value. Many lenders will base the value on the actual purchase price you have agreed, and then you’ll need to put in your deposit based on that (so 120k property discounted to 100k, customer putting in a minimum of 10% = 10k deposit required). On the flip side, some lenders accept the discount as a form of deposit and use the true market value at 120k (so with 20k discount and a minimum deposit of 12k required, it may even be possible to buy with no contribution for deposit from yourself). There’s different types of concessionary purchase; Landlord gift; developer gift; vendor gift; and family gift.
Landlord gifted deposit/discount
This is where a tenant buys from their landlord at a discounted purchase price. Say for instance the house is valued at £200k, but for a quick sale the landlord offers it to his tenants for £180k, knocking 10% off the value, this 10% can be used by the borrower towards their deposit.
Currently there are relatively few Landlord discount mortgage lenders now, but there are still some out there who consider these applications. Often there’s limits imposed on the amount of discount acceptable, and cannot be below a certain percentage (any discount under 5-10% will not count toward deposit). Some lenders may also stipulate that the borrower puts in at least 5% of their own cash – usually because this then indicated a certain level of commitment by the borrower who is then statistically more likely to maintain repayments.
Developer gifted deposit /discount
In a similar fashion to the landlord gifted deposit, a housing developer can sell a new property at a discounted price and the lender take this into account towards the borrowers deposit. Again most lenders will stipulate that the borrower put in some of their own cash as well, which is often more because new build properties can be seen as higher risk and many lenders require a 15-20% deposit regardless.
Vendor gifted deposit /discount
Again, similar to a developer or landlord discount, just a normal purchase on the open market but at a discounted value, usually to ensure a quicker sale. These are less common and less frequently accepted by lenders as the risk is higher, with them establishing the properties true value and the reasons why the vendor would want to sell at a cheaper price.
This is the same as a vendor gifted deposit, but as a discount purchase from a family member. These are more common arrangements and often come with much larger discounts from the true value of the property. As a result more lenders are accepting of these arrangements as the risk is deemed lower and the reason behind the discount more palatable, and some lenders don’t require the borrower to input any of their own cash, using the whole discount as their deposit.
For many people the above options just aren’t possible – whether that’s down to not having a wealthy family member willing to help out, credit score, or maybe an affordability issue. If you’ve been declined or are unsure about it’s still a good idea to seek advice on things as the specialists we work with can point you in the right direction for what you need to do next.
If you’re ready to make an application or if you just have an enquiry, please fill out our quick form below and an expert will be in touch ASAP. If you require help immediate assistance please call 0800 304 7880.