Entering the world of mortgages and home ownership for the first time can be a confusing process. One of the first hurdles is deciding what size deposit to put down – and subsequently how hard you will need to save to achieve this.
How much should you put down on a mortgage deposit?
It’s not really how much should you, it’s how much can you? The main issue first time buyers face is finding that deposit, but we discuss the subject below from all angles to help you understand why it needs to be considered in more ways than one
What is a mortgage deposit?
A mortgage deposit is a lump sum payment that you pay for your house purchase. It’s the sum of money that you put towards the purchase, rather than the money you’re borrowing from the bank or lender. The size of your deposit will affect the interest rates you receive on the amount you borrow and of course the more you can put down as a deposit the lower the sum you will need to borrow and pay interest on.
There is no standard minimum percentage that home buyers need to put down as a deposit in order to secure a mortgage on a property.
There is no standard minimum percentage that home buyers need to put down as a deposit in order to secure a mortgage on a property. It all very much depends on the individual circumstances of the buyer and even now, it’s possible to buy a house with no deposit at all if you’ve got the right financials to back it.
A rule of thumb many people use is: the bigger the deposit you put down initially, the better the mortgage deal you’ll get from a lender and the lower the overall amount you will be paying off through your loan.
While there is truth in this, there’s also a bit more to it.
What is a 'good' loan to value ratio?
When we talk about 85 per cent, 90 per cent or 95 per cent mortgages, we mean the percentage of the total property value that is being borrowed. So, if you are able to save up £10,000 for your deposit on a property worth £100,000, your mortgage will be a ‘90 per cent mortgage’ – or ‘90 per cent loan to value’, or a ‘90 per cent LTV mortgage’ or a’ loan to value ratio of 90 per cent’ – however you want to phrase it!
A good loan to value ratio for you will mostly depend on how much capital you can raise at the start of your mortgage and your subsequent ability to make monthly payments.
For those in the position to save, raising a larger deposit of 15 per cent or more can be a smart option. The lender is taking less of a risk if you can provide a higher deposit and this often enables them to provide better interest rates on the money you do need to borrow through a mortgage.
But this isn’t always possible, and borrowers shouldn’t break the bank trying to save this much if it’s outside of their current means.
The number of 90 per cent and 95 per cent mortgages offered by lenders has increased in recent years after an initial crackdown in the wake of the 2008 recession. It is once again possible to meet lenders’ affordability criteria with a deposit of 5 to 10 per cent.
So, weigh up your options and look at the long-term costs with a realistic eye on what you will be able to save as a deposit. Couple this with some earnest research of the market looking at how much you’ll save by putting down a larger deposit and you’ll be in a good position to decide what a good loan to value ratio is for you.
But remember, the deposit is one third of the big three things to consider. You need to understand how much can you borrow, which will be determined by income and affordability. And then there is property prices, how much of a deposit will you need to raise to achieve the kind of property you want?
Raising a deposit
It’s never too early to start saving. The trick to raising a deposit is to save as much as possible as soon as possible. If you still have substantial time before you plan to get a mortgage, put a portion of your monthly salary into a savings account each month.
If you’re unable to do this, there are some more drastic options such as moving back in with parents, sharing a flat with friends, downsizing your expenditure or selling your car. It’s also well worth researching schemes like the government’s Help to Buy scheme to help you reach your deposit target faster.
What if you can’t raise a deposit at all? There are limited options for those who don’t have any deposit at all. These include new build developer loans where you can receive a loan from a property developer to be repaid over a set course of time, or guarantor loans where a family member can use their property as security for your mortgage.
Ideas and support to raise a deposit
Help to Buy equity loan – receive a 20 per cent loan from the government (40 per cent in London), while you put in 5 per cent. A mortgage will then cover the remaining value.
Shared ownership – buy a share of a property from a housing association with a deposit and a mortgage, and pay rent on the remaining share. Buy a house with friends or family – share the ownership of a property with a close friend, sibling or partner to reduce the individual burden.
Help to Buy ISA – a savings account that offers a 25 per cent bonus from the government when purchasing your first home.
Get a loan from your parents – sometimes the easiest way to get on the property ladder is with some help from your parents or a trusted family member. They can either help you pull the deposit together as a gift or issue you an informal loan.
Lifetime ISA – a tax-free savings or investments account offering a 25 per cent government bonus designed to help people under 40 buy their first home or save for retirement.
What’s the advantage of having a large deposit?
- Better mortgage deals – the larger your deposit, the more likely it will be that you will be offered favorable deals from lenders on interest rates. This is because their risk is reduced against fluctuations in the property’s value.
- Less risk – If you own more of the actual property at the start of your mortgage, you are more likely to be able to pay off the loan and reduce the risk of negative equity if the market fluctuates.
- Cheaper mortgage repayments – your repayments are calculated on the outstanding amount borrowed from your lender. Essentially, the larger the deposit you put down initially, the less you’ll have to pay in monthly repayments because the smaller your loan will be.
- Greater chance of acceptance – having a larger pool of money available at the start of the mortgage should mean lenders will be more likely to approve you as a borrower, widening the pool of mortgages you can choose from.
Top tip: Remember that buying a property also comes with additional costs such as solicitor’s fees and Stamp Duty. You should factor this in to the time it will take to save for your deposit.
Finding the best deal for you
Saving for a larger mortgage deposit is one of the best ways of getting a cheaper deal. But the deposit you save up will depend on the value of the house you are buying, your current salary and your general ability to raise capital.
Before deciding on the size of your deposit, it’s important to take a measured look at your financial situation. Consider how much you will be able to save as well as the impact your mortgage will have on you in the long-term. Sometimes, waiting an extra few months or years may be the best option for some, while for others it’s just a case of searching hard for the best mortgage deals on the market.