How to get a low deposit mortgage
The smallest deposit that you can buy a house with currently is 5%. A more common ‘low’ deposit is 10%, as borrowers have far more options if they are looking to borrow 90% of the property’s value, or LTV.
About low deposit mortgages
Getting onto the housing ladder isn’t easy. House prices have jumped sharply over 2021, making it even more of a challenge for would-be buyers to get together a sufficient deposit.
However, low deposit mortgages may prove the answer and allow these buyers to get onto the housing ladder.
What is considered a low deposit on a house?
The smallest deposit that you can buy a house with currently is 5%. 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.
» COMPARE: Low deposit mortgages
However, very few lenders actually offer mortgages to borrowers with such small deposits, which is why the government has now launched a mortgage guarantee scheme, 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, or LTV.
The Help to Buy Equity Loan scheme
Buyers with only a 5% deposit can also make use of the Help to Buy Equity Loan scheme. Qualifying buyers can get an equity loan from the government worth up to 20% of the property’s value, which is interest-free for five years, and then complete the purchase with a 75% LTV mortgage.
The Help to Buy Equity Loan scheme has been revamped for the 2021-23 period, and is now only available to first-time buyers, while there are also regional caps in place for the value of the property you can purchase through the scheme.
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.
» MORE: About negative equity
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.
Where can I find a low deposit mortgage?
A host of lenders have announced that they will be offering 95% mortgages once the government’s mortgage guarantee scheme goes live in April.
» COMPARE: 95% LTV Mortgages
You can apply directly to lenders, or you can use a mortgage broker. These independent advisers 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.
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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