How to get help with a mortgage deposit
The larger your deposit, the less you have to borrow to cover the cost of your home, which often means lower interest rates. A few schemes and options are available to help build as big of a deposit as possible.
Help with a mortgage deposit
A mortgage deposit is essential if you want to buy a home, as there are currently no standard mortgage lenders in the UK who will lend you the full amount needed to buy a property, without help from others. There are some products marketed as 100% LTV but these are reserved for those with a guarantor, who effectively takes responsibility for the repayments if you are unable.
Mortgage lenders design their products based on the loan-to-value (LTV), which is essentially how the size of the loan compares to the overall value of the property.
The highest LTV on offer at the moment is 95%, meaning you will need to get a 5% deposit together to cover the cost of the purchase (but not associated costs). The government has launched a new mortgage guarantee scheme designed to encourage more lenders to offer 95% LTV mortgages, ensuring that borrowers with small deposits enjoy more choice.
Big vs small deposit
Building as big a deposit as possible is generally a good idea, for a couple of reasons.
Firstly, you’ll enjoy more choice when it comes to finding a mortgage. Lenders view higher LTV loans as being more risky, whereas they are happy to offer deals to borrowers with more significant deposits. If you have a 30% deposit you’re likely to have many more deals to choose from than if you only have a 5% deposit, for example.
Then there’s pricing. Because of that perception of risk, the rate of interest charged by lenders increases as the LTV goes up. Products are priced on LTV bands, so a lender may design products at 60% LTV, 70% LTV, 80% LTV and so on. As you move up those bands, the interest rate increases, meaning that the loan ‒ and your monthly repayments ‒ become more expensive.
Finally, there’s negative equity. This is when your outstanding mortgage is higher than the value of your property, and is the result of falling house prices. Negative equity can be a problem, as it can prevent you from remortgaging to a cheaper deal or moving house and you’re more at risk of dropping into negative equity if you only buy with a small deposit.
What mortgage deposit help is available?
A host of different schemes are designed to help buyers build their deposits or buy with a small deposit.
For example, the Lifetime ISA can speed up your deposit saving. You can save up to £4,000 in one each year. In addition to the interest paid on your balance by the ISA provider, the government will top up your balance by 25% each year, up to an annual cap of £1,000. There is a catch though ‒ you have to use that money to buy a house (or for your retirement) or else you’ll have to pay a charge when withdrawing the money.
Then there’s the Help to Buy Equity Loan scheme. This allows buyers to supplement a deposit of at least 5% with an equity loan from the government worth up to 20% of the property’s price. They can then get a 75% mortgage to complete the purchase. There is no interest to pay on the equity loan for the first five years, though the scheme is limited to first-time buyers and there are regional caps on the maximum price of the property you are buying.
» COMPARE: First Time Buyer Help to Buy Mortgages
Another option is shared ownership. As the name suggests, this is where you buy a portion of a property, rather than all of it, and share ownership with a developer or local authority. This can make home ownership a reality for borrowers with only a small deposit and who would not be able to get on the housing ladder otherwise.
» COMPARE: Shared ownership mortgages
Other ways to get help with a mortgage deposit
One of the most common forms of help with mortgage deposits comes from the so-called ‘Bank of Mum and Dad’. A large number of home purchases each year ‒ particularly by first-time buyers ‒ involve the parents or grandparents of the home buyer gifting the buyer some money for their deposit.
There are also some mortgages designed to allow parents and family members to provide help without giving you the money in cash. For example, some products see a charge taken out against a portion of the value of the parents’ home. This security means that if the property is sold at a loss, the parent is responsible for making up the shortfall to ensure the mortgage is paid off in its entirety.
Other mortgages work in a somewhat similar way, but instead require your parent or grandparent to move their savings into a savings account provided by the mortgage lender as a sort of guarantee. If mortgage payments are kept up, the parent or grandparent will receive their money back with interest after a set period of time.
Can I get a loan for a mortgage deposit?
When you apply for a mortgage, the lender will ask you to explain where the funds for your deposit are coming from. If you take out a loan to supplement your deposit, then you will need to declare it here.
Be warned, doing so may damage your chances of getting a mortgage as the loan may push the overall LTV of your total borrowing to a level a lender is uncomfortable with.
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more