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Getting onto the housing ladder isn’t easy, and one of the main challenges would-be buyers face is getting together a sufficient deposit.
However, low deposit mortgages may prove the answer and allow these buyers to get onto the housing ladder.
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What is a low deposit mortgage?
The smallest deposit that you can buy a house with currently is 5%. This means you’d need a 95% loan-to-value (LTV) mortgage. Your loan-to-value ratio is your mortgage amount as a percentage of the value of your property.
There was a time when you could easily borrow the entire sum needed to purchase a property, but the financial crash put paid to those days, meaning borrowers need to stump up at least some money as a deposit now. It’s important to note that there are some products marketed as 100% LTV mortgages but these are reserved for those with a guarantor or existing customers and under specific conditions.
However, very few lenders actually offer mortgages to borrowers with such small deposits, which is why the government launched a mortgage guarantee scheme in 2021, designed to push more lenders to provide these mortgages.
A more common ‘low’ deposit is 10%, meaning borrowers have far more options if they are looking to borrow 90% of the property’s value.
» MORE: Getting a mortgage on a low income
The pros and cons of low deposit mortgages
The big positive of a low deposit mortgage is that it makes buying a house a little easier. It’s less difficult to put together a 5% deposit than a 10% deposit, and it’s also going to take less time to do so which means that you may be able to get onto the housing ladder quicker.
There are some important downsides to be aware of though. You won’t have the same level of choice if you only have a small deposit as fewer lenders are willing to offer mortgages to buyers with a small deposit.
You will pay more too. Lenders view low deposit mortgages as being riskier than those for buyers who have more significant deposits in place. As a result, not only do you have fewer products to choose from, but you also have to pay a higher interest rate to boot. This means that your monthly repayments will be bigger, and therefore the overall cost of your loan will be higher too.
Finally, the risk of negative equity is greater with a low deposit mortgage. This happens when house prices fall and the size of your outstanding mortgage is greater than the value of your home. Being in negative equity can make it nearly impossible to remortgage to a new deal when your initial fixed rate ends, while it’s also really difficult to move house as the money raised from the sale will not be enough to clear your existing mortgage, let alone provide a deposit to use on the house you want to buy.
Dropping into negative equity is easier to do when you buy with a low deposit, since the value of your home only has to fall by a relatively small amount. With a 95% LTV mortgage, the property only has to fall by 6% to end up in negative equity, but with an 80% LTV mortgage, it would have to fall by 21% for you to end up in that position.
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Where can I find a low deposit mortgage?
The banks and building societies that offer mortgages to borrowers with bigger deposits tend to offer low deposit mortgages too.
You can apply directly to lenders, but it’s a good idea to get a mortgage in principle before making a formal application. This will give you an idea as to whether a lender is likely to offer you a mortgage and for how much. Alternatively, you can use a mortgage broker. A mortgage adviser can help you work out which lenders are most likely to approve an application from you, while some lenders only offer their deals through brokers. As a result, using a broker may mean you enjoy a greater level of choice.
» MORE: First-time buyer mortgages
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