Options for first-time buyers, especially those of you with a small deposit, may seem thin on the ground. But, in fact, there’s an innovative array of mortgages which can help you access homeownership. Kate Saines explains more…
As a first-time buyer you may think you will be excluded from many mortgages. But there are certain deals which are tailor-made for those who are about to take the leap onto the first rung of the property ladder.
We’ve rounded up five mortgage options which could prove just the ticket if you are buying your first home with a small deposit. Whether you have financial help from family or are going it alone – here are some loan solutions to help you start your homeownership adventure.
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Guarantor mortgage
If you have family or close friends who want to help you get onto the property ladder, but they are unable to gift you the cash, then Guarantor Mortgages are certainly worth a look.
Your family member or close friend acts as a guarantor and agrees to take responsibility for your repayments in the event you cannot pay.
They will not own the property or be on the deeds, they simply provide assurance to the lender that there is a financial Plan B should you – the buyer – default.
What to watch out for… These mortgages are 100% loan-to-value (LTV) deals therefore you don’t require a deposit. But you must still pay fees and other costs associated with moving, so make sure you have some money put aside for this.
There can also be big risks for the guarantor – for example they may damage their own credit score if the person they are supporting defaults and they themselves struggle to keep up with repayments. Lenders like to see evidence the guarantor is aware of these risks and has taken legal advice.
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Joint Borrower Sole Proprietor
If your income doesn’t stretch to cover repayments and you have a family member keen to invest in your property – this could be the ideal solution.
A Joint Borrower Sole Proprietor (JBSP) might be a bit of a mouthful but it is quite straightforward. Both you and your family member or friend – say it’s your mum – are named on the mortgage and both your incomes are included. But whilst you are named as the owner the property, your mum will not be.
This allows your mum’s income to be taken into account for the purposes of the loan but you will be the sole owner of the property. This means your mum, if she’s already a homeowner, will not be liable for second home tax.
What to watch out for… Like guarantor mortgages, there are risks with JBSP so your family member will need to be confident about the agreement they are entering into.
You will also need a deposit – typically 5% or more – so you will need savings to cover this and the other house purchase and moving costs.
This is quite a niche area of the mortgage market so it’s advisable to go through a mortgage broker who can help you access deals which may not be on the direct-to-consumer market. They will also offer you advice and guidance around taking out this kind of mortgage.
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Family deposit mortgage
We’ve already discussed guarantor mortgages where borrowers can take out a 100% mortgage with the assurance a close friend or family member will repay the loan if there’s a problem.
Family deposit mortgages take this a step further. The borrower requires no deposit but the supporting family member puts the equivalent value of a deposit in cash into a linked savings account.
For the lender this acts as a tangible guarantee, for the buyer it means they don’t need to find a deposit, for the supporting party their money is earning interest in a savings account.
Barclays Springboard mortgage is probably the most common mortgage in this category. Lloyds also offers a similar product called Lend a Hand and Halifax and Nationwide have their own versions.
What to watch out for… The person providing the deposit will have their money returned at the end of the mortgage term (usually between three to five years) with interest unless the borrower has defaulted. Therefore make sure both parties are comfortable with the potential risks.
Remember a 100% loan is risky because if property prices fall during the time you are repaying the mortgage you may fall into negative equity.
For this reason, it’s a good idea to speak to a broker before taking out one of these deals, they will be able to advise you on how to manage your mortgage to avoid this.
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Shared ownership
This is a great option for anyone who doesn’t have financial support from the Bank of Mum and Dad but who is struggling with affordability and deposit saving.
Shared ownership allows you buy and own a proportion of the property and rent the rest.
It means you only need a deposit and mortgage for the percentage of the property you buy and this lowers the affordability barriers. You can purchase between 10% and 75% of the home’s market value using a shared ownership mortgage.
Imagine the property in question was priced at £250k and you had a £10k deposit – in normal circumstances you wouldn’t even be able to put down a 5% deposit. But, with shared ownership, if you purchased 50% the value, your loan would reduce and your deposit would cover more than 10% of purchase price.
What to watch out for… There are certain restrictions on shared ownership so check you are eligible first.
For example, your annual household income must be £80,000 or less (£90,000 in London) and only certain properties are available under the scheme so you’ll need to apply through relevant housing associations.
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Low deposit mortgages
Not everyone has the benefit of the Bank of Mum and Dad. For those without financial family support the routes to homeownership can seem few and far between.
But the good news is they do exist. It’s just a matter of find the one to suit you.
Support schemes
Start off by looking at first-time buyer support schemes. We’ve already mentioned shared ownership but there is also the First Homes Scheme, which helps people buy a home at a 30% discount.
Eligibility criteria apply but lenders involved in the scheme offer low deposit mortgages so it’s well worth considering.
The Deposit Unlock scheme is currently available on new builds in certain developments and allows low deposit borrowers to take out an insurance-backed home loan.
Meanwhile, first-time buyers can continue to take advantage of the government-backed 95% Mortgage Guarantee scheme. Available through participating mortgage lenders, the loans are available to borrowers with a good credit rating who have a minimum of 5% deposit.
The idea is the government provides the guarantee for the loan, taking the risk from the lender and enabling more borrowers to become eligible. It’s available until December 2023.
100% mortgages
Whilst 100% mortgages without family assistance have not existed since the financial crisis in 2008, one lender recently put its head above the parapet to offer a no deposit mortgage.
Skipton’s Track Record mortgage, which is available for people who have been reliable at making their rental payments made headlines when it launched in May 2023.
The big risk with this one is negative equity but Skipton said it had taken this into account with the calculations – as such criteria is tight.
If you are would-be first-time buyer with a small deposit it’s worth speaking to your broker about all these options. There will be one solution which will be just right for you.
