With a no-deposit mortgage, a person is able to purchase a home without paying a deposit out of pocket. This option may help a person who has little money saved or would rather spend his savings on new furniture and moving expenses. The cons of a 100-percent mortgage, however, can be serious. When a borrower doesn't make a deposit on a mortgage, the lender takes on more risk in granting the loan. To account for this risk, the lender will typically apply higher interest rates and require the borrower to purchase private mortgage insurance (PMI).
A no-deposit mortgage may make it possible for a person with good credit, but no savings, to purchase his own home now rather than waiting an extended period of time while he attempts to save a deposit. It may also prove helpful for people who have savings but need to purchase a good deal of furniture, afford high moving fees, or pay other expenses. By obtaining a mortgage without a deposit, a person can ensure he has the money to meet other goals.
Unfortunately, there are also cons to obtaining a mortgage without a deposit. In most cases, seeking a 100-percent mortgage means making a commitment to paying more in interest. When a lender grants a 100-percent mortgage, the borrower doesn't have any equity in the property, which means none of his money is at risk. Instead, the lender takes on more risk than it would with a traditional mortgage loan. To make up for this risk, a lender typically charges this type of borrower much more in interest.
Another con of getting a mortgage without a deposit is the fact that lenders will typically require the borrower to purchase PMI. PMI is a type of insurance coverage that lenders typically require of borrowers who put less than 20 percent down on a mortgage. It adds to the overall cost of a loan for the borrower but helps protect a lending institution against the risk it incurs by granting loans to no-money-down borrowers.
For some borrowers, an additional con of obtaining a mortgage without a deposit may be that the loan is more difficult to obtain. Many lenders apply stricter criteria to borrowers who will not pay a deposit. In many cases, borrowers who want this type of loan will need excellent credit and enough income to demonstrate that they can afford the mortgage and meet their other expenses.