Wednesday, 16 January 2019

Getting a mortgage – without a deposit

Mortgage calculator
Yes, you read that headline correctly. You can get a mortgage, even as a first-time buyer, without having a deposit.

Sounds too good to be true? Sadly, for most people it probably is. But read on to see if you could be one of the lucky few.

Some lenders (and there aren’t many of them, to be honest) will give a mortgage to cover 100 per cent of the purchase price of your new home. But only if someone else is willing to guarantee that you will keep up the payments.

You will no doubt have noticed that every mortgage advert you see contains the words “Your home may be repossessed if you do not keep up repayments on your mortgage” – or something similar.

Repossession is the mortgage lender’s final trump card. If you don’t keep up your mortgage payments, the lender will eventually kick you out of the house and sell it. That’s the way it can be sure it will get its money back.

But – you will be pleased to know – lenders really don’t like to do that. Just on a practical level, it’s messy and complicated from the lender’s perspective. So, what if the lender could be sure of getting its money back from someone else, not you?

That’s the basis on which you may be able to get a 100 per cent mortgage – a loan for the full cost of the house.

It’s called a guarantor mortgage, where a friend (it would have to be a really good friend) or a family member takes on some of the risk of your loan by offering their own home or their savings as ‘security’ for the lender. Whoever it is becomes what is known as a ‘guarantor’. If you don't make your mortgage repayments, the lender then gets the money from your guarantor instead.

So, you can get a mortgage without a deposit if you have a guarantor who the lender thinks will be certain to come up with the cash if you can’t.

And that’s why only a few people are able to get a 100 per cent guarantor mortgage. You have to have a guarantor. Who do you know who trusts you enough to put their own home or savings at risk to help you take that first step on the ‘property ladder’? It’s a ‘big ask’ that you’ll be making.

But it can be done. The Bank of Mum and Dad may come up with the guarantee.

Of course, you don’t need to go for a 100 per cent loan to take out a guarantor mortgage. You could borrow less than the full purchase price of your new home and still use a guarantor mortgage.

So, why would you want to do that?

Well, for a start, you may be able to get a better interest rate because the lender will see you as less of a ‘risk’. This particularly applies if you have a poor ‘credit history’ such as regularly going overdrawn at the bank or missing payments on your credit cards.

If you decide to go down the guarantor mortgage route, both you and your guarantor are responsible for the mortgage repayments. And, just as you will (if it all goes wrong) have your home repossessed if you cannot afford to repay the loan, your guarantor could (in the worst of all circumstances) lose their home as well.

For example, if you owed your lender £250,000 but it was only able to recover £200,000 by repossessing your property and selling it (which could well happen if property prices go down), your guarantor would be liable for the remaining £50,000.

If your guarantor couldn't find the money, their home could be repossessed as well. Usually, though, they would be able to take out a second mortgage on their home to repay the debt. But that still saddles them with a potentially large additional monthly payment they have to find as a consequence of their generosity in guaranteeing your mortgage.

There are a number of variations on the basic guarantor mortgage, with greater or lesser risks for the guarantor.

For example, under a so-called ‘family offset mortgage’, parents or grandparents put their savings into an account linked to your mortgage. The amount in the account is deducted from the amount of the loan that you pay interest on, which is good news for you. The bad news for the family is that they don’t get any interest on their savings. And if you stop making your mortgage payments, they could lose all the money in the account. If all goes well, however, eventually they do get their money back.

Some lenders offer a similar mortgage scheme where the family’s money is put into a special account and is held as security against the mortgage. They still get interest paid on their savings (although the rate will not be as good as they'd get with other investments). And if you meet all your repayments, it won't cost your guarantor a penny.

If you don’t make all your repayments, though, the lender can take the money from the guarantor’s account.

It can all get a bit complicated. So, we’d strongly recommend that you (and your guarantor) get some good independent financial and legal advice. Everyone needs to know exactly where they stand and what the risks are.

There is real danger of families being torn apart if things go wrong. You and your guarantor may have every confidence now that the lender will never need to call on the guarantee. But you do need to think seriously about what happens if you cannot keep up your payments.

That said, a guarantor mortgage can be a great idea. And it could allow you to get a mortgage without a deposit.

It has to be worth looking at, surely?

For advice on finding an independent financial adviser and a quick estimate of what your monthly mortgage repayments might be, take a look at our mortgage calculator.