While the idea of buying a house without a deposit may seem challenging for many people, there are several potential options. Of course, you will need to be conscious of not overstretching your finances, but just because you can’t afford the full deposit doesn’t necessarily mean the end of your dream. We will now take a look at the various options available, how they work and the benefits.
Is it possible to obtain a 100% mortgage?
Since the US financial crisis of 2008, we have seen many mortgage banks retreating from 100% home finance deals. Problems with the US sub-prime mortgage market impacted the broader market; the US economy and contagion saw these issues spread right across the world. A decade later, worldwide base rates are still at or near historic lows, with no return to “normal interest rates”likely in the short-term. Against this background, it may be difficult to believe that there are 100% mortgages available. On occasion there may be!
There are numerous factors to take into consideration such as:-
When applying for a mortgage in your name or joint names, you will need to demonstrate a regular income stream to cover mortgage repayments. It is safe to say that the authorities are not necessarily keen on 100% mortgages. However, where an individual/joint income stream offers a significant buffer between monthly repayments, this can open the door to 100% mortgages.
It may be that you have additional properties, other assets or perhaps you have an insurance policy or investment approaching redemption. The income and extra security mix may well be enough to persuade a mortgage lender to offer a 100% mortgage. The home you are purchasing will still be held as security against the mortgage, but the additional collateral will create a financial buffer.
The greater the level of security you can offer against a mortgage, the higher the loan to value (LTV) ratio. Consequently, if you have a guarantor, usually a family member or a business acquaintance, this can prove very useful. The mortgage lender would need to credit check the guarantor. If you were to default, the debt would revert to the guarantor. While the income of the guarantor will be taken into account, additional collateral may be required.
On the whole, as a consequence of the 2008 US mortgage crisis, mostpeople will find it challenging to secure a 100% mortgage. However, thankfully there are other ways to acquire that dream home without a deposit.
Bank of mum and dad
The good old bank of “mum and dad” has proven very useful for many older children looking to acquire their dream home. A number of the so-called “baby boomers”, born between 1946 and 1964,have found themselves sitting on debt-free dwellings, which have often increased dramatically in value. Many of these were acquired on relatively small mortgages, which were paid off years ago, leaving scope to build savings and investments. Indeed, even properties bought as recently as the 1980s have left many homeowners with huge paper profits.
Many parents have one eye on the future, building an inheritance for their children on their passing. However, in recent years we have seen a change of thinking by some parents. Maybe it is better to provide financial assistance today, when needed, rather than on their death?
Indeed, lending or gifting funds to your children can often play an integral role in long-term tax planning. Therefore, it is essential to take financial advice to ensure that you take the most appropriate action for your scenario.
Parents taking personal loans
As we touched on above, many parents who acquired their home years agonow find themselves sitting on significant paper profits. This type of security can open many doors when it comes to personal loans. On the flip side, individuals and young couples climbing onto the first rung of the property ladder may not have the income or collateral to secure deposit finance. When paying back the personal loan, there are three standard options:-
- Parents will cover all repayments
- Children will cover all repayments
- Both parties contribute to the repayments
When it comes to acquiring a family home, these tend to be long-term investments and historically, they have increased in value. There may be an opportunity to release equity in the future which could be used to repay parent personal loans.
Cash offers, bridging loans and refinancing
Even though property markets have been a little volatile recently, there are always opportunities for those willing to make cash offers. In this day and age, any property purchase may involve a chain of transactions. If there is one weak link in the chain – perhaps a mortgage has been refused – this can bring the whole chain of transactions crashing down. As a consequence, cash is and always has been King in the world of investment. So how might this assist those looking to acquire a home without a deposit?
Picture the scenario; a first-time buyer is just short of the deposit requiredfor their potential future family home. The market is relatively quiet, there is a bargain to be had, but you need to close the deal as soon as possible. In recent times, we have seen many people looking towards cash offers funded by part savings and part bridging loans. As the term “bridging” suggests, this is a short-term stopgap to be refinancedat a later date,on more competitive rates.
If the buyer required a $20,000 deposit but could only raise $15,000, this would leave a shortfall of $5000. Let us assume that the property in question was worth $150,000 with the seller willing to take a discount for cash. A bid of $135,000 may be enough to seal the deal using short-term bridging finance of a net $120,000 – after taking into account the partial deposit funds available.
While those providing bridging loans would still require security, in this instance, the home and proof of income, this type of finance is normally agreed much quicker than a mortgage. So in effect, you are making a cash offer with no chain and no ties – very tempting for a seller, especially one looking for a quick sale. Property bought!
Now, we have part two of the property investment. So, the situation is as follows:-
Property value: $150,000
Purchase price: $135,000
Bridging finance: $120,000
In theory, there is already $30,000 of equity in the property. This is the difference between the purchase price and the market value and the partial deposit. This will help when seeking long-term mortgage finance. Consequently, it should be easier to secure a mortgage on an LTV ratio of 80%. This equates to $120,000, which will be used to repay the relatively expensive short term bridging finance (usually up to 12 months in duration) compared to long-term mortgage rates.
Moving house, bridging finance
Bridging finance is also used by those looking to move home where perhaps the timing of the sale and purchase is not quite right. The bridging loan would be secured against the new or original property, if there was sufficient equity, to effectively fund the gap between the sale and purchase dates. Once the original property was sold, the existing mortgage repaid, it is simply a case of refinancing the new property. If there is additional equity available from the original property, this would usually be used when refinancing the new property.
The structure of traditional bridging loans will allow the client to roll-up interest for a period of up to 12 months. This effectively means no repayments for 12 months or until the original property is sold and the second property refinanced. The level of bridging finance available would take into account:-
- The value of the new/existing properties
- Outstanding mortgage
- Rolled up interest (including a degree of interest on interest)
- The buyer’s financial situation
- LTV ratio.
If you take a step back and look at the property market, this will always play an integral part in the finances of banks and homeowners. Consequently, it is no surprise to see that government schemes are often announced when property markets are struggling. In recent times there has been a trend towards governments providing a degree of financial support for first-time buyers. This may involve the authorities covering the cost of a deposit, maybe taking a stake in the property, allowing potential buyers to secure mortgage finance. How does this work in the long term?
It will depend upon the type of scheme and the structure, which may allow:-
- Repayment of the loan with no interest charge
- Repayment of the loan with a nominal interest rate
- Repayment of the loan when the property is sold
- Government receives a percentage of the sale proceeds when sold
- Homeowners can buy out the government stake in the property at market value
While we have seen some very attractive government schemes created to assist first-time buyers, it is vital to be aware of the details and the potential consequences.
Buying a property without a deposit
Even though there are numerous ways to acquire that dream home without a deposit, you need to be realistic about your finances. The bank of “mum and dad” has grown in popularity in recent times. Many parents have shown a preference for helping their children while they are alive instead of focusing on leaving an inheritance. We also have the scenario where cash is King – it can be a powerful tool and a means of avoiding unstable property chains.That dream home may still be in reach!