Saving for a mortgage
deposit can be the most daunting element of buying a house, but remember that there’s no set amount you’ll need to put down.
With the wide variety of products offered by banks, and the array of schemes offered by the government nowadays, you can buy a property with just a 5% deposit, or even 0% in some cases.
The larger your deposit, the smaller your loan and the less you’ll have to repay each month. If you can manage to save up a large deposit, you’ll be able to find better and cheaper deals.
However, of course, waiting to save up as big a deposit as possible will mean waiting longer to put your foot on the property ladder and potentially having to pay more for your property if in a period of rising prices.
It’s also crucial to remember that the amount you can borrow is also dependent on how much you earn, as well as other factors.
How much can I borrow for a mortgage?
The main factor for how much you can borrow comes down to what you earn and spend. The amount you will be able to borrow depends on the quality and sustainability of your income, as well as your monthly outgoings.
These are the crucial parts of lenders’ “affordability criteria” – essentially working out how much you can afford to borrow. Different lenders have different methods, so remember that some lenders will be able to lend you more than others and compare what you can get accordingly. You can calculate how much you are likely to be lent with a variety of online calculators.
The other main driver is loan to value: in the current market, you would usually need a deposit of at least 5% of a property’s value to successfully get a mortgage, with the bank lending you the remaining 95% of the property’s value.
To get the cheapest and most competitive mortgage offers on the market, you’d typically need to have a deposit of 40% or more, although this is unrealistic for most first-time buyers.
The more you put down on your deposit, the better and lower the mortgage rate tends to be.
What if I only have a small deposit?
There are a number of government-backed initiatives to help more people get on the property ladder and own their own homes, such as the Help to Buy scheme.
For example, with the Help to Buy: Equity Loan scheme, you only need a 5% deposit to own a newly-built home worth up to £600,000. You can borrow up to 20% (up to 40% in London) of the purchase price from the government, with a 75% mortgage (55% in London) to make up the rest.
If you are set on getting together a big deposit, there are ways to increase your own savings. You could buy with a friend or consider shared ownership and shared equity schemes.
For example, with the government’s Help to Buy: Shared Ownership scheme, you can buy a share of your home and pay rent on the rest. When you are able to afford to, the government will sell you a bigger share in your home.
Many young people also rely on the ‘bank of Mum and Dad’, with family contributions helping them get a foot on the property ladder.
Why is it better to have a bigger deposit?
Apart from the fact that your monthly repayments will be cheaper, with a bigger deposit you are more likely to successfully get a mortgage – and a better mortgage – as lenders will be more likely to believe you can afford your mortgage repayments each month. If you only put down a small deposit, you are more likely to fail affordability checks, as lenders will see that you’ll need to spend more on your mortgage repayments.
Secondly, it’s less risky to have a big deposit, as it makes it less likely that you will fall into negative equity. This is when a borrower owes more on their mortgage than their property is actually worth. It is wise to avoid this risk, as being in negative equity can make it impossible to move house or transfer to another mortgage. Worse, if you are in negative equity and you temporarily lose your source of income, you are at a high risk of repossession.
This is the biggest lump sum of money I’ll have to pay, right?
While the mortgage deposit is the biggest lump sum you’ll have to fork out when buying a house, don’t forget that there are several other costs associated with buying a house other than the deposit, including stamp duty, solicitors’ fees, mortgage fees, survey costs, land registry fees and removal fees.
You might also need to pay for renovations or buy new household appliances, so bear these additional costs in mind when trying to work out the size of your deposit.
Can I buy a property without a deposit?
In some cases, depending on whether you meet the right criteria, some lenders will lend you 100% of the price of the property – known as a 100% LTV mortgage – but this will have very high costs associated with it.
Because the lender is taking on so much additional risk by providing you with a 100% mortgage, there will typically be a higher rate of interest to compensate.
Because these types of mortgages are more risky, they are often limited; often only to existing borrowers or to borrowers with financial help from their families. They are also sometimes available to borrowers with a guarantor, who would have to assume responsibility if the borrower failed to keep up their payments.
If you do have some money for a deposit, it’s better to put this down initially rather than trying to apply for a 100% mortgage, as it will help you get a cheaper mortgage overall.