How much deposit do I need?

What is a deposit?

A deposit is the sum of money you need to provide from your own savings before you can get a mortgage. This initial payment represents the equity you have in the property at the time of purchase. For first-time buyers, the minimum deposit required is usually 5% of the property's price. For example, if the house costs £200,000, you would need a £10,000 deposit.

How to save for a deposit

We know that saving for a deposit can feel like an uphill battle, especially when you're juggling rent and other bills. But hang in there!

Saving a fifth of your disposable income monthly will contribute to the growth of your deposit fund, bit by bit.

You could also consider looking into savings accounts that offer decent interest rates or explore options like a Lifetime ISA (LISA), where the government chips in with a bonus. We're rooting for you on this journey!

What is loan-to-value (LTV)?

Loan-to-value (LTV) is how much of your house price you're borrowing from the bank compared to how much you're putting down as a deposit.

The higher your LTV, the riskier it is for the bank, which might mean you don't get the best mortgage rates. Saving up a bigger deposit lowers your LTV, which can help you get better mortgage deals. Since first-time buyers usually have smaller deposits, they often end up with higher LTVs.

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Can I get a mortgage without a deposit?

Getting a mortgage without putting any money down is pretty uncommon. These are called 100% mortgages, and they're not easy to come by. Usually, you'd need someone, like a guarantor, with a solid credit history to vouch for you. They use their property as collateral. If things don't go well and your house is repossessed and sold for less than what's owed, they're responsible for covering the remaining amount. It's a significant commitment, so it's essential to consider all the implications before deciding to pursue this option.

Reasons to save a bigger deposit

While a 5% deposit is the minimum required, saving a larger deposit offers several advantages.

Cheaper repayments & better deals

A larger deposit reduces the amount you need to borrow, resulting in lower monthly repayments. It also provides access to more competitive mortgage rates, as you are considered less of a risk to lenders.

Improved chance of acceptance

Lenders are more likely to approve your mortgage application if you have a larger deposit. This demonstrates financial stability and reduces the risk of default.

Less risk

A bigger deposit reduces the risk of negative equity, where your mortgage exceeds the property's value if house prices fall. Owning more of your property upfront provides greater financial security.

Options to help with your deposit

If saving for a deposit seems daunting, there are some options that can help you boost your savings.

Shared ownership

Shared Ownership offers you the chance to own a portion (anywhere from 25% to 75%) of a property while paying rent on the part you don't own. It's a flexible arrangement because you can gradually buy more shares whenever you're ready.

To be eligible, your household income needs to be under £80,000 outside London or £90,000 within London. It's worth noting that Shared Ownership properties are always leasehold, which means you'll have certain responsibilities and restrictions to consider. But overall, it's a great way to step onto the property ladder without needing a massive deposit upfront!

Buy a house with friends

Teaming up with friends to buy a property can definitely ease the financial burden. However, it's crucial to have a clear legal agreement that spells out everyone's share and responsibilities. This agreement should cover details like who pays what, how decisions are made, and what happens if someone wants to sell or move out.

Keep in mind that all parties involved are equally responsible for paying off the mortgage debt. So, before you jump in, it's wise to have an open discussion and consult with legal experts to ensure everyone's on the same page and protected. It's all about making sure everyone's comfortable and informed before taking this exciting step together!

Help from parents or family

First-time buyers often get a helping hand from family members, which can make a world of difference when it comes to getting a mortgage. This support can take various forms:

A financial gift (gifted deposit): Sometimes, family members gift money to help with your deposit. This can give you a significant boost and reduce the amount you need to save on your own.

A loan: Your family might offer to lend you money towards your deposit. It's essential to discuss the terms and repayment plan carefully to avoid any misunderstandings down the line.

Putting your savings in a linked account: Some families opt to link their savings to yours, providing additional security or leverage when applying for a mortgage. This arrangement can strengthen your financial position in the eyes of lenders.

Acting as a guarantor on a mortgage: Parents or other family members can act as guarantors, essentially vouching for you if you're unable to meet your mortgage payments. This can increase your chances of approval, especially if you have a limited credit history.

Getting a joint mortgage: Another option is to apply for a mortgage together with a family member, typically a parent. This can increase your borrowing power and make it easier to qualify for a loan, especially if your income alone isn't sufficient.

Lifetime ISA (LISA)

A Lifetime ISA is like a special savings account supported by the government, specifically meant to help you squirrel away cash for your first home. With this account, the government offers a 25% bonus on your savings, up to £4,000 annually, until you reach the age of 50. This incentive can significantly enhance your deposit fund, making it an attractive option for aspiring homeowners.

To open a LISA you must be between 18 and 40 years old.

Buy-to-let deposits

If you're considering a buy-to-let property, be aware that the minimum deposit required is usually higher than for a residential mortgage, typically between 20-40% of the property's value.

Frequently asked questions

When do I pay my deposit?

You hand over your deposit when you exchange contracts, showing that you're serious about buying the house.

Who do I pay my deposit to?

Your conveyancing solicitor handles the deposit payment, transferring it to the seller's solicitor at the exchange of contracts.

Can I borrow money to pay for my deposit?

Using a loan for your deposit is possible but scrutinized by mortgage brokers. They will assess your ability to repay both the loan and the mortgage. However, loans from family members are generally viewed more favourably than those from commercial lenders.

Does bad credit affect the amount of deposit I need?

A bad credit history can impact your mortgage application, but you may still qualify for a mortgage. Lenders will consider your debt-to-income ratio, the nature of your credit issues, and your recent financial stability.

Need more information about your next mortgage?

Saving for a deposit is absolutely essential when it comes to buying a house. For more guidance on how much deposit you need to buy a house and what you can afford, head to Just Mortgages or contact Darlows to explore your options.