Homeownership Dreams vs. Financial Reality: The Risks of 0% Deposit Mortgages

According to the latest data from Pepper Money's Specialist Lending Study, aspirations for homeownership remain strong, with 85% of Gen Zs hoping to own a home at some point. However, misunderstandings around mortgage requirements, lower financial resilience, and low confidence in the application process continue to hold many potential buyers back. Over a quarter of millennials who are not yet on the housing ladder don't think they'll ever be in a financial position to purchase their own home, compared to just 8% of Gen Zs. 

Saving for a deposit remains one of the biggest challenges for aspiring first-time buyers. The average UK adult has £13,200 in savings – just over a fifth of the average first-time buyer deposit of £61,900, according to UK Finance. Only 15% of people are saving more than £500 a month. It's little wonder that 49% of Gen Zs who have bought a home reported receiving help from the "bank of mum and dad". 

Despite financial pressures and difficulties in saving a deposit, the study suggests a healthy flow of first-time buyers over the coming years. Data indicates that 1.2 million UK adults expect to be in a financial position to buy their first home within the next 12 months, with an additional 1.5 million in 1-2 years, 1.8 million in 2-3 years, and a further 2.2 million in 3-5 years. 

The rise of 0% deposit mortgages 

Navigating mortgage options can be daunting for first-time buyers, particularly with the rise of 0% deposit mortgages compared to the traditional 10–25% deposit. In the UK, most lenders' lowest deposit option is around 5%, resulting in a 95% loan-to-value ratio. While this is available, lenders generally favour borrowers with deposits of 10% or more, often offering better interest rates as a result. The higher your deposit, the lower the risk you represent to the lender, giving you access to a wider range of cheaper mortgage products with more favourable terms. 

A 0% deposit, or "no deposit", mortgage allows buyers to take a loan for the full value of the property. These products aim to provide first-time buyers access to the housing market, particularly when high rental costs and the cost of living make saving a deposit challenging. Eligibility typically requires a good credit score, regular income, and low levels of debt, and lenders will need evidence that you can afford the monthly repayments. 

The advantages of a no-deposit mortgage include immediate entry onto the property ladder, the ability to start building equity in your home, and potential opportunities to remortgage for a better deal once the initial mortgage ends. However, these should be approached with caution – these products are by no means an easy route to homeownership. While they provide immediate access, there are significant risks compared to traditional mortgages with a 10–25% deposit. 

1. Higher costs: 100% mortgages carry higher interest rates than loans backed by a deposit. Even a small deposit can significantly reduce your monthly repayments and total interest paid over the life of the loan. 

2. Negative equity risk: If the property market fluctuates and sees a crash, you're at risk of falling into negative equity. This essentially means your property is worth less than what you owe on it. If property values fall, borrowers without a deposit have no financial buffer and could end up owing more on their outstanding balance on their mortgage than the property is worth. This risk is minimal with a 10–25% deposit, which acts as a protective cushion. 

3. Higher loan-to-value ratios: A 0% deposit mortgage means your loan-to-value ratio is 100%, often resulting in higher monthly repayments and less flexibility if personal circumstances change. Lenders generally prefer borrowers with a deposit, as it reduces risk, often giving access to lower interest rates and better mortgage terms. 

4. Long-term affordability: Borrowers taking out no-deposit mortgages may find themselves stretched financially in the early years. Without equity built up, they have limited options to refinance or remortgage to a cheaper deal. 

5. Limited mortgage options: Some lenders restrict access to certain products if no deposit is available, meaning borrowers may face fewer options and potentially less competitive terms. 

When comparing 0% deposit mortgages with more traditional options, the difference isn't just the deposit required – it's the interest rates and fixed-term options borrowers are offered. According to Moneyfacts, two-year fixed rates for higher-LTV mortgages (95%) average around 5.3%, compared with 4.3% for borrowers with a 40% deposit. Five-year fixed rates show a similar gap: 5.7% for 95% LTV versus 4.6% for 40% LTV.

Higher-LTV deals often push borrowers into longer fixed terms at higher rates, limiting flexibility and increasing long-term costs. Borrowers with larger deposits can access more competitive two- or five-year fixes at lower rates, potentially saving thousands of pounds in interest over the life of the mortgage.

While no-deposit or very low deposit products are important for improving access to homeownership, this data highlights that they can come at a premium. Even a small rate difference can translate into significant additional interest, making deposit size a key factor in long-term affordability.

Example: £200,000 Mortgage

Scenario 1: Very low deposit (95% LTV / 5% deposit)

• Loan: £190,000

• Two-year fixed rate: 5.3% (Moneyfacts average)

• Monthly repayment: £1,053

• Total interest over 2 years: £12,700  

Scenario 2: Larger deposit (40% deposit / 60% LTV)

• Loan: £120,000 Two-year fixed rate: 4.3% (Moneyfacts average)

• Monthly repayment: £614

• Total interest over 2 years: £4,900

As Paul Adams, Sales Director at Pepper Money, comments, "Zero-deposit mortgages can seem like a quick way onto the property ladder, especially for first-time buyers struggling to save. But the reality is these products come with higher interest rates, fewer lender options, and a far greater risk of financial strain if the market fluctuates. In contrast, a 10–25% deposit reduces monthly repayments, gives access to better mortgage deals, and provides a buffer against negative equity. Buyers need to carefully weigh the immediate benefit of getting a home now against the long-term financial stability and flexibility that a traditional deposit offers. For many, patience in saving a deposit can be a safer, more sustainable path to homeownership. 

Whether opting for a 0% deposit mortgage or a more traditional product, it'scrucial to remember that a mortgage is a legally binding contract. Failure to repay can result in the lender repossessing the property, so careful consideration is encouraged ahead of committing. First-time buyers should research thoroughly and seek advice from a mortgage broker or independent financial advisor who can help them navigate the mortgage process to best suit their needs."