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Banks won’t just give you 100% of a property’s purchase price any more, but if you can get a family member who owns a property to be a guarantor you can still borrow 100%. If that isn’t an option then you need to build at least a 5% deposit to get a mortgage. There are more ways to do that than you probably realise.
After the 2008 global financial crisis, UK banks tightened their lending criteria. As a result, lending someone a 100% mortgage is now considered too risky.
Most lenders prefer that borrowers have a 20% deposit, but that is becoming increasingly difficult to save in the UK. More banks are therefore now willing to lend you up to 95% of a property’s value, meaning you would need to raise a 5% deposit.
A family member (usually a parent) who owns their own property outright can guarantee your deposit. Your guarantor uses their property as security in place of a deposit.
You borrow the money and make repayments as usual, but the guarantor is partly responsible if you can’t meet your repayments. A guarantor can cover part or all of a deposit or even the loan itself.
Here are the basic things you need to know about guarantors:
You can scrape a deposit together from many sources. Lenders do want you to have at least 5% of a property’s value in genuine savings, but there is a way around this. You can get a deposit together in the following ways:
The genuine savings rule is the tricky issue with the options above (and the fact that not everyone can take advantage of gifts or assets). But if money from a gift, sale or inheritance has been sitting in your account for three to six months, most lenders will accept it as genuine savings regardless.
Lastly, you can save a 5% deposit the old-fashioned way and look for a low deposit mortgage. There are many mortgages out there which you can get with a 5% or 10% deposit.
How do you spot a low deposit mortgage? Look at the maximum loan to value ratio (LTV), which should be 90-95%. A 90% LTV means a 10% deposit. A 95% LTV means you only need a 5% deposit.
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In order to incentivise people to buy homes, the UK government has several schemes you can take advantage of. However, these schemes are specifically aimed at first-time buyers to help them get on the property ladder.
Probably the most significant risk involved is the risk of negative equity. This is where you owe to your mortgage lender an amount greater than your property is actually worth; for example, if you took out a 100% mortgage and purchased a flat worth £225,000, but the value of the property then dropped to £190,000, you’d still owe the bank £225,000. This can cause serious issues if you then find yourself needing to move, or remortgage. The risk of negative equity will diminish as time passes and you pay off more and more of your mortgage, but it’s important to bear in mind that in the first few years the risk is significant.
The only way you can borrow more than 100% of a property’s value is by using a guarantor. With a guarantor some lenders will let you borrow up to 110% of a property’s value.
Most lenders require you to have 5% of a property’s value available as a deposit. It’s possible to get 100% of a mortgage if a property-owning family member will be your guarantor, but they may have to pay up if you can’t. Overall, the main risk of a 100% mortgage is running into negative equity.
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