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Adam French
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Working out how much you need to put down for a house deposit is key if you’re trying to get a mortgage, especially if you’re buying for the first time. Read on to learn more about deposits, how much you need to get a mortgage, and the benefits of saving a large deposit.
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What is the minimum deposit for a mortgage?
Generally, you should aim to save a deposit worth at least 5% of the cost of the property you want to buy. This allows you to look at 95% loan-to-value mortgages, where a mortgage will cover the 95% of the purchase price that your deposit doesn’t. So if you’re looking at a property that costs £200,000, you’ll usually need a minimum deposit of £10,000 to get a mortgage.
We say usually because it is sometimes possible to get a 100% mortgage without a deposit. However, there are very few no deposit mortgages available and you’ll usually need a relative or friend willing to be your guarantor to get one. Most lenders will still expect you to have a deposit if you want a mortgage.
What is a mortgage deposit?
A mortgage deposit is the lump sum you pay upfront when applying for a mortgage to buy a property. Whatever deposit you put down will be the equity you own outright in the property when you buy. The mortgage you’re taking out will then cover the rest of the cost of the property.
Why is the size of your deposit important?
When getting a mortgage the size of your mortgage deposit helps determine your loan-to-value, or LTV. This, in turn, helps determine the mortgage rate you could get.
Your loan-to-value ratio is the value of the mortgage you want to borrow expressed as a percentage of the value of the property you’re buying. So if you have a £5,000 deposit and are looking at a property worth £100,000, you need a mortgage of £95,000 and are borrowing at 95% LTV.
Importantly, mortgage rates tend to be lower, the lower the loan-to-value you borrow at. There’ll be more mortgage deals to choose from too, and having a higher deposit can help lower your LTV.
» MORE: Compare current mortgage rates
Should I save a larger mortgage deposit?
Some of the advantages of having a bigger mortgage deposit include:
- Better mortgage deals – mortgage rates tend to get lower the larger the deposit you can put down.
- More mortgage options – the higher your deposit, the more mortgage deals you’ll usually have to choose from.
- Cheaper mortgage repayments – your monthly repayments should be lower because you’re taking a smaller mortgage and interest rates tend to be lower with a bigger deposit.
- Better chance of being accepted – borrowing less and lower repayments should improve your chances of passing the affordability tests carried out by lenders when deciding whether to offer you a mortgage.
- Reduces risk of negative equity – if house prices fall, a bigger deposit reduces the chance of dropping into negative equity, where you owe more on your mortgage than your home is worth.
Where can a mortgage deposit come from?
Most people save up for their mortgage deposit, particularly first-time buyers. However, you may be able to raise funds in other ways too, to either add to your savings or perhaps be used on their own.
You can expect a mortgage lender or broker to ask where your mortgage deposit came from. You may also be asked to provide ‘proof of deposit’, to confirm its origins. What is considered an acceptable source of a mortgage deposit can differ between lenders, but some common ways to pay for a deposit include:
- Savings – using money you’ve put aside yourself is the most common way to fund a deposit. A lender may want to see bank statements and proof of income as part of its deposit checks.
- Inheritance – money you‘ve inherited is usually acceptable as a deposit. You may need to provide proof of how much you received and a bank statement.
- A gifted deposit – this is where you’re given money by a family member or a close friend for a deposit. Lenders usually want confirmation from the donor that the money is a gift, and you won’t have to pay it back.
- Selling another property – raising a deposit by selling your current home is widely accepted by lenders. Among other requirements, you may need to provide proof that you owned the property and of the sale.
- Releasing equity – if you own another property, you may be able to release equity from it to cover a deposit for another home. Importantly, you’ll have to show you can afford the repayments on both.
» MORE: How to release equity to buy a second home
What can’t be used as a mortgage deposit?
Some of the potential sources of a deposit that lenders are more likely to reject include:
Cash – if you try to pay for a deposit outright in cash, it is difficult for lenders to meet obligations around money laundering and where the money has come from.
Unsecured loans – most lenders turn away deposits raised through a personal loan or a credit card due to the need to pay off both your mortgage and the loan at the same time, and the effect it can have on your affordability for the mortgage.
How to save a mortgage deposit
Saving a deposit for a mortgage can be challenging. It can often take several years, and will usually require measures such as budgeting and cutting back on non-essentials where you can.
But it’s also important to make sure the funds you have saved are working hard for you. At the very least, this means keeping the money you have in savings accounts that pay a decent interest rate.
The government introduced the Lifetime ISA (LISA) intending to help prospective homebuyers save for a deposit. If you’re aged 18 to 40, you can open a LISA and save up to £4,000 each year tax-free, until you’re 50. Crucially, the government will add a 25% bonus to whatever you save, up to £1,000 a year.
» MORE: Getting help with your mortgage deposit
Getting a mortgage without a deposit
If it’s proving difficult to save for a home, no deposit mortgages are a potential alternative where you, personally, aren’t required to put any money down as a deposit.
Often also called 100% mortgages, because you’re borrowing the entire value of the home you’re buying, there are only a few no deposit mortgages available. Where they are offered, you’ll usually need a family member, or perhaps a close friend, to be your guarantor for the mortgage and agree to cover your repayments if you don’t. However, this puts their home or savings at risk too.
» MORE: No deposit 100% mortgages explained
Schemes which may mean you need a smaller deposit
Shared Ownership
With the Shared Ownership scheme, you buy a percentage of a property, and pay rent on the percentage you don’t own. Crucially, the deposit you need will be 5% to 10% of the share you’re buying, rather than the full value of the property.
H3: Right to Buy
The Right to Buy scheme gives many council tenants the opportunity to buy the property where they live at a discount. Some lenders may also accept the discount as the deposit for a mortgage. Schemes are available in England, Scotland, Wales and Northern Ireland, but may have different rules, while there’s a similar Right to Acquire scheme for housing association tenants.
Help to Buy
Designed specifically to help homebuyers with smaller deposits, the Help to Buy equity loan scheme is currently available in Wales, but no longer an option if you’re buying in England, Scotland and Northern Ireland.
Forces Help to Buy
If you’re a current or past member of the Armed Forces, you may be eligible for the Forces Help to Buy Scheme. An interest-free loan of up to half your salary to a maximum of £25,000 which can be used to cover home buying costs, including a deposit.
Deposit Unlock scheme
The Deposit Unlock scheme gives first-time buyers and home movers the chance to purchase a new-build home from a participating builder with a 5% deposit.
First Homes scheme
Aimed at first-time buyers and key workers in England, the First Homes scheme provides the chance to buy a new-build property at a discount of up to 50%. Importantly, the deposit required is based on the discounted price.
» MORE: Best mortgage lenders
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