What is a Mortgage Deposit?
A mortgage deposit is the money you pay upfront when buying a house.
The larger the deposit the less money you need to borrow to make up the difference so the smaller the mortgage will be which in turn means lower monthly mortgage payments.
Most people save up for many years before they can afford a deposit. Some are lucky enough to have family who can help with a deposit, or receive a lump sum windfall, such as an inheritance.
What Percentage of the Property Value Should a Deposit be?
There is not a perfect level of deposit but it is important to understand that the higher your deposit the smaller your mortgage will need to be.
The Loan-to-value (LTV) level is set by the amount of equity in your home compared to the amount you need to borrow. The higher your deposit the lower your LTV will be.
For example, for a property worth £200,000 a 10% deposit (£20,000) would mean you’d need to borrow the other 90% (£180,000), so your LTV would be 90%. If your deposit was 20% (£40,000) your LTV would be 80%.
A low LTV is a good thing as it represents less risk to the lender. This means that you can usually secure a better interest rate.
Usually lenders will require a minimum deposit of between 10% and 20% of the value of the property you wish to buy. However, the government’s Help to Buy scheme for new properties allows a 5% deposit for first-time buyers.
For example if you were buying a property worth £180,000 a 5% deposit would need to be £9,000, a 10% deposit would be £18,000 and a 20% deposit would be £36,000.
When Do You Have to Pay the Deposit?
A 10% mortgage deposit is usually paid when you exchange contracts on the house with any balance paid on completion. The deposit is usually held by the seller’s solicitor and is not officially released to the seller until the house sale has been completed.
Unlike deposits paid when you rent a car or a ‘damage deposit’ when you rent a flat or a room, a mortgage deposit is not refundable.
You do not get your mortgage deposit back when the sale completes, as that money is being used to purchase the property, along with the money you’ve borrowed from the bank or lender via your mortgage.
Can I get a Mortgage with No Deposit?
Yes. It is possible to get a 100% mortgage. This is a mortgage where you borrow the full value of your property and do not put up any money yourself upfront.
However no deposit mortgages are extremely rare because they represent a big risk to the lender. Their reasoning is, if you struggle to save for a deposit then you might also struggle to make your monthly mortgage repayments.
Another option is to look for a no deposit mortgage where a family member who owns their own home can act as a guarantor. This is called a guarantor mortgage and it means that your family member will be obliged to make up for any mortgage payments that you miss.
Their home, or a portion of their savings, will be used as security for the loan so should you default their home could be repossessed.
To secure a no deposit mortgage you will also need a good credit score to show that you will be able to make the repayments on your mortgage.
Can I get a Mortgage with a Low Deposit?
Yes. A low mortgage deposit is considered to be from 5% to 10% (so the mortgage would be either a 95% or a 90% mortgage). It is possible to get mortgages with a low deposit but it will mean that the interest rates are likely to be higher as you represent more of a risk to the lender.
The government’s Help to Buy or Mortgage Guarantee scheme can help you to secure a mortgage with a deposit of just 5%. If you’re a first time buyer they’re well-worth looking in to. Contact us for a no obligation discussion – we love helping people buy their first home!
If you currently rent a council house or housing association property and have a household income of less than £80,000 (or £90,000 in London) then you could be eligible for a shared ownership property. This means you only buy part of the house (and rent the rest) so your mortgage and deposit can be smaller.
Does Having a Large Deposit Make it Easier to Get a Mortgage?
Yes! The larger the deposit you can afford to save the better. The bigger the deposit you have the better your LTV and the smaller your monthly mortgage repayments will be.
If you can save for an extra year or two to push your 5% deposit up to a 10% deposit, this can mean that many more mortgage deals are available to you and most likely with more favourable interest rates too.
However it is key to remember that delaying buying in a rising market while you save for a deposit might mean that despite extra saving the rise in house prices mean your deposit still only comes to 5%.
Reasons to Save Up for a Bigger Deposit
- A larger deposit means that you will be eligible for a greater variety of mortgage deals so can secure a lower interest rate.
- The larger the deposit the smaller the mortgage you need to take out which means your monthly repayments will be less.
- Lenders are more likely to accept applications from people who have a larger deposit simply because it means their monthly payments will be lower and so the mortgage is more affordable.
How Much of a Deposit Do I Need for a Buy-to-let Mortgage?
In general you need a higher deposit for a buy-to-let mortgage. Most buy-to-let mortgages require a deposit of between 25% but there are some lenders who will give a buy-to-let mortgage with a deposit of 20%.
Do I Need a Deposit for an Interest-Only Mortgages?
Yes. In fact you’ll need a bigger deposit for an interest-only mortgage than for a traditional mortgage. Most interest-only mortgages require a deposit of at least 25% but for the best deals you might need an even bigger amount.
Can My Parents Gift Me a Home Deposit?
Absolutely and this is becoming an increasingly popular way for parents or grandparents to help their family members get on the property ladder.
A gifted deposit is when a family member gives you money towards your deposit. It is not a loan and it does not give them any stake in owning your home. The money must be freely given with no expectation that it be repaid.
It is not without complications though because UK tax law means that you can’t just give a family member a large sum of money.
You should consider the possibility of paying inheritance tax if the person who gifted you the money dies within seven years of the gift then you may have to pay inheritance tax on the amount. This can be a horrible financial shock to a young, cash-strapped first time buyer – especially on the back of losing a loved one.
What is a Gifted Deposit Letter?
To make this legally clear most people use a Gifted Deposit Letter written by the person gifting the money. This letter will prove that the money is a gift and therefore not a taxable inheritance.
The letter must include the following information:
- Their name
- Your name
- The amount they are gifting
- A statement confirming that the money is a gift
- A statement confirming that the gift has no commercial interest
- A statement that they have no commercial or financial stake in the property
All lenders use either their own form or a simple letter (including the details above) from the donating party.
If you are thinking of using a gifted deposit then it is sensible to speak to a mortgage advisor who can help steer you through the mortgage application process.
Can You Get a Loan for a Mortgage Deposit?
It is possible to take out a loan to secure a mortgage deposit but many lenders will be wary of lending to someone who would need to pay back a loan and a mortgage at the same time.
Those with a good credit score would be more likely to be looked upon favourably by a mortgage lender in this circumstance. However you should be aware that lenders will view you as a high risk if you use a loan to pay your deposit because the loan will impact on the affordability of the mortgage as the lender will take the loan repayments into account.
How to Save Up for a Deposit?
First of all you need to look at the price of houses or flats in the area you’d like to buy so you can get an idea of how much you’d need to save for a deposit.
For example if the average 1-bedroom flat in your area costs £250,000 and you are aiming for a deposit of 10% then you would need to save £25,000 for a deposit.
It is a good idea to try and save a set amount every month. To save up a deposit of £10,000 you would need to save £167 every month for five years. Try and save a realistic amount but also try and save as much as you can in order to speed up the process.
Consider setting up a special bank account just for your deposit which has the best possible interest rate in order to maximise your savings.