Can you really buy a house with no money down?

The web is full of articles and workshops that promise to build a 1m property portfolio for ₤50,000. Other sites promise that first-time homebuyers that they can buy the house of their dreams with zero down.

Many people are lured into the buy to let market by promises that they can have £1m worth of properties, and ₤50,000 in the banks.  The pitfall is that you can do this.  Investors are building multimillion pound portfolios in months, by following a few rules. 

First time homebuyers are warned away from these schemes, not because they don’t work, but because they are high risk.

First Time Homebuyer

Most first time homebuyers want a property to live in.  They do not have the money for a down payment, so they buy into one of these schemes – and wasted their money.  Here are a few rules to help you avoid losing your money, and ending up homeless.

Property Brokers

First time homebuyers do not need a property broker to help them get a home with no money down.  The broker simply does some paperwork that is normally done by a lending company, and keeps a nice fee for their efforts.

If a mortgage company offers zero down mortgages, then anyone can apply either directly or through a mortgage broker.  Property brokers do not have an ‘in’ with the mortgage and property companies.  They are not alerted to new developments, and projects before hand.  If they tell clients this, they either read the newspaper and found the information, or they are lying.

Property Portfolios

It only takes a short drive around London to see that there is something wrong with the promises of wealth in the buy-to-let market.  "For Rent" signs are popping up faster than Tulips in the spring. All of these buy-to-let landlords with 1m property portfolios are looking at vacant properties that still have hefty mortgages due.  This money needs to come from somewhere.  The ₤50 000 in the bank will disappear quickly if one property is vacant for a few months each year.  In fact, while ₤50,000 sounds like a lot of money to have in the bank, it isn’t when managing a £1m property portfolio.

The math doesn’t add up.  The scheme promises this.  You to start buying homes with ₤50 000, and then own 4 or 5 homes, with ₤50 000 still in the bank, after all mortgage fees and taxes.  Something is wrong.  The problem is that you owe 100% on each property, in a first and equity release mortgage. 

That means that your normal mortgage fees are compounded.  Most people who enter the buy to let or property accumulation schemes look at rents and the monthly repayment of the first mortgage.  The math works, because there is a couple hundred pounds of rental profits each month.

Unfortunately, what the property owner forgets is that the second, equity release mortgage, is expensive. In some cases, it might be as high as half the first mortgage, even if it is only for ₤20,0000 - ₤30,000. 

Interest Only Mortgages

These are one of the most dangerous mortgage products on the market.  The interest only mortgage often requires a smaller down payment, but after 25 years, not one sterling pound has been paid off the capital.

Here is the catch.  The entire mortgage is due when the mortgage matures.  If the capital has not been paid off, the house must be remortgaged.  Unfortunately, after 25 years, the house will not be worth what it is today.  Even if it is well maintained, most people prefer to buy new homes. 

Reality Check

Most households in the UK are struggling to maintain their current standard of living.  Many are doing without luxuries just to meet basic needs.  It is not only unethical to make promises to young adults that they can become rich with property investment, it can be considered morally wrong.  Promising young people that they will make a fortune with a property portfolio is akin to the mutual fund nightmare of twenty years ago.

The risk is astronomical.  A couple months with 2 or 3 vacancies, an increase in interest rates, illness, or unemployment can topple the entire house of cards leaving the dreamer in bankruptcy court, and hunting for a cheap house to rent.