Considering a low deposit mortgage?

If you are a prospective first-time buyer (FTB), you may have considered low or no-deposit mortgages to help you get on the property ladder. However, these are complex loans, so it is important to be fully informed before making a decision.

The government has also recently announced a new FTB initiative, called Your First Home, which is expected to support eligible buyers with smaller deposits through a government-backed equity loan. As with any homebuying scheme, it is important to understand the eligibility criteria, costs and long-term implications before proceeding.

Things to consider

Higher loan-to-value (LTV) mortgages can come with higher interest rates than some lower-LTV alternatives, although this varies between lenders and products. Lower rates are available with a 5% or 10% deposit – your mortgage adviser can assess whether it’s advisable to save for a for a little longer so you can increase your deposit and access better deals.

With such a high LTV ratio, you would be at greater risk of falling into negative equity – this is when the amount you owe your mortgage lender is more than the value of your property.

Even if you have a low deposit, you will likely still need to pay a substantial sum of money upfront. You should factor in Stamp Duty, conveyancing fees, surveys, moving costs and other unforeseen expenses. You will therefore still need to prepare your finances to afford this.

No deposit deals

If you have a 100% LTV (with no deposit), you could consider guarantor or family-assisted mortgages. A guarantor mortgage is when a relative or close friend may become responsible for some or all of the mortgage debt if the borrower cannot meet their obligations. The guarantor does not have a share in the property, but their own home would be at risk if they cannot repay the loan either.

The details of family-assisted mortgage vary depending on the lender. It can involve a relative putting a set amount of savings into an account linked to the mortgage - this acts as security on the mortgage, which is released back to the family member after a specific length of time.

What are the limitations?

Making overpayments would help you to pay off your mortgage quicker, if you are in a better financial position in future. Lenders generally have a limit on how much you can overpay and there may be repayment charges, so check the terms.

Some low-deposit deals do not include certain new-build homes or they have a limit on the property’s value. This may affect your ability to buy your ideal home, so consider if it is worth the compromise.

Seek advice

Don’t jump into anything - talk to us first.

Your home may be repossessed if you do not keep up repayments on your mortgage

Sources: https://www.gov.uk/first-homes-scheme

https://www.whatmortgage.co.uk/news/no-deposit-mortgages-5-things-ftbs-should-watch-out-for/