What are low deposit mortgages?
Low deposit mortgages are just as they sound, mortgages with the minimum possible deposit. These can be 95% mortgages, 100% mortgages or even mortgages with government schemes such as the help to buy equity loan where the borrower is essentially putting down just 5% while the government loans them an additional 20% outside London and 40% in London.
Low deposit mortgages could also be in the form of a mortgage lender simply requesting a very low mortgage deposit such as 5%. Usually these will only be offered to borrowers with good credit whom have passed the lenders affordability requirements easily.
The benefits of Low deposit mortgages
Low deposit mortgages allow first time buyers to get on the property ladder without too much financial commitment. This means first-time buyers can save for a smaller mortgage deposit and get on the property ladder quicker.
With rising house prices and stable interest rates it presents a great option for a lot of first-time buyers who typically would have had to save an extra 10-15%.
The drawbacks of Low deposit Mortgages
- If interest rates rose, borrowers will be exposed as those whom are not on fixed rate mortgages will see their monthly mortgage repayments rise and could see first-time buyers miss payments and risk their homes being repossessed.
- At best, they could see a negative record marked on their credit file if they miss mortgage repayments which will not help when it’s time to remortgage their current mortgage deals.
- Low deposit mortgages have a high risk of negative equity. Negative equity is when the debt on a property is more than the property is valued. This means that the borrower owes more on their mortgage than the property is worth. This makes it incredibly hard for borrowers to remortgage their current mortgages and in some cases discourage borrowers from paying back their mortgage.
Low deposit mortgages also tend to be very expensive as they come with high mortgage arrangement fees. They are also notorious for having high interest rates which make the risk of negative equity even greater.
Although low deposit mortgages do offer a path on to the property ladder, It should be approached with great care, almost like an investment. Because in truth, it is one. A very risk one. Seek the services of a professional digital mortgage broker.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.