June 30, 2022
You’ll need a deposit to get a mortgage, but how much is enough? In this article, we explain what a mortgage deposit is, the minimum you need and why saving more can help you access the best mortgage deals.
What is a mortgage deposit?
A mortgage deposit is an upfront amount of money you put towards a house purchase. Your deposit and mortgage added together will cover the total purchase price of a property.
A deposit reduces the risks to the mortgage lender, it also acts as a signal of your financial position, which is why financial experts encourage you to save as much as you can before buying a house.
A survey by Barclays found that 73% of first-time buyers wish they’d started saving for a home earlier. Over half (56%) had to rely on family support to raise the money they needed to purchase their first properties.
While it can be daunting to start saving from scratch for your first home, there are several schemes, including Help To Buy ISAs, that can help you build a healthy deposit needed to buy a property. The government will add 25% to your savings account, helping you realise your dream sooner.
What’s the minimum deposit needed to buy a house?
Mortgage rules and rates change so frequently that it can be hard to keep up. The days of 100% mortgages are gone, and you’ll need to have a house deposit of at least 5% to secure a mortgage.
What does a 5% deposit look like?
£100,000 mortgage £5,000
£200,000 mortgage £10,000
£350,000 mortgage £18,750
The easiest way to calculate the mortgage deposit is to take the total property price and multiply it by 0.05.
In the UK, the average deposit was just over £60,000, says Barclays. However, the figure is likely to be skewed by high prices in London and the southeast. Thankfully, first-time buyers can get on the property ladder with a much more realistic deposit across Yorkshire.
What is a mortgage LTV?
When searching for a mortgage, you may see something called the LTV. The loan-to-value ratio is the relationship between a deposit and a mortgage. For example, a mortgage with a 5% deposit has a 95% LTV. A 10% deposit has a 90% LTV.
When searching for a mortgage, you’ll see LTVs listed, but most lenders make it easier by listing deposit percentages alongside their products.
How much deposit do I need for a buy-to-let mortgage?
You’ll need a higher deposit if you’re an investor wanting a buy-to-let mortgage. To access a buy-to-let mortgage, you’ll need at least a 20% deposit.
Deposit requirements are much higher than comparable home mortgages because buy-to-let mortgages are riskier investments for lenders. So, a higher deposit means lower monthly repayments that have to be covered by rent.
Why bigger deposits = better mortgage terms
The bigger your deposit, the more attractive you are as a customer, which can translate into significant savings. There can be up to a 1% difference in mortgage interest rates between those with 5% and 10% deposits.
Over your fixed term, this could save you thousands of pounds (depending on the size of your mortgage).
Also, the bigger the deposit you have, the smaller your overall mortgage borrowing – so you’ll already be paying back less each month than someone with a smaller deposit.
A larger deposit means less risk for the lender, increasing your chances of being offered a loan. Because a more significant deposit means lower loan repayments, you’re more likely to pass increasingly strict affordability checks and be accepted for a mortgage.
Personally, a larger deposit means you own more of your home from the start providing extra peace of mind. It also means you’re less likely to fall into negative equity, a situation that occurs when your house is worth less than the outstanding mortgage.
What other factors affect my chances of getting a mortgage?
Having a high deposit is essential to getting a mortgage, but other important factors affect your chances of being successful, including:
- Credit history
- Credit score
- Income and affordability
- Levels of debt
- Spending habits
We’ve created an article with our top tips on getting a mortgage. In addition, you’ll find information and advice on practical things that you can do to increase your chances of successfully applying for a mortgage.
One of the best things you can do is speak to an experienced mortgage broker. Each lender has its own criteria for offering a mortgage which a broker will understand. They will listen to you and understand your circumstances before identifying the loan product with the best chances of success.
At Simon Blyth, we work with recognised advisers from the Mortgage Advice Bureau. They work with a panel of over 90 lenders and can provide all customers with access to exclusive deals and rates. They’re authorised and regulated by the Financial Conduct Authority and have helped thousands of homebuyers get their first foot on the property ladder.