One of the most significant financial commitments that a person can make in their lifetime is to purchase a home. For the majority of people, this purchase is only made possible with the assistance of a mortgage.
However, before receiving a mortgage, the lender will require the borrower to provide a deposit. This deposit is essential as it reduces the financial risk to the lender, and in return, offers a better mortgage rate to the borrower.
In this blog, we will be discussing how much deposit is needed to secure a mortgage in the UK, as well as the different factors that can affect the amount that is required.
What deposit do you need for a mortgage?
In the UK, the amount required for a mortgage deposit varies based on several factors, such as the type of mortgage you are applying for, your financial situation, and the lender you choose to go with.
It is essential to note that even if you have the minimum deposit available, this may not be sufficient for some buyers, especially if they have a lower than perfect credit score or low income. Lenders may also take other factors such as your age, employment status and overall financial situation into account when determining the required deposit amount.
The larger the deposit, the lower the loan-to-value ratio (LTV) of the mortgage, translating into better mortgage terms and interest rates. So generally, the more significant the deposit, the better the terms of the mortgage will be. For example; a deposit of 20% or more can result in better interest rates and lower monthly payments.
Some lenders are offering 100% mortgages (under the requirement that borrowers can demonstrate that they have had 12 months of on-time rental payments and also have a good credit history). They claim that they are trying to help during what is a very difficult time financially for many families. However, the governor of the Bank of England has warned potential buyers to be wary of what they sign up for, suggesting that “People can often get stuck with mortgages for a long period of time which they can't trade out of."
What is the minimum deposit for a mortgage?
For a standard purchase, most lenders will require a minimum deposit of 5-10% of the property’s value. For instance, if you are buying a house for £250,000, you will have to have a minimum deposit of £12,500 - £25,000.
Do I need proof of my deposit?
Prior to granting a mortgage, lenders require proof that the borrower has the necessary funds for the deposit. You will need to provide evidence of the source of your deposit funds, for example, bank statements, payslips, or savings account statements.
If the funds are coming as a gift, the lender will require a letter from the gifter to confirm the amount and the purpose of the gift.
Can I get a loan for a mortgage deposit?
Acquiring the required deposit for a mortgage can be a daunting task for many aspiring homeowners, especially in the current economic climate where the cost of living continues to rise. However, it is reassuring to know that there are several viable options to help overcome this challenge.
One of the most common solutions is obtaining a loan specifically for the mortgage deposit. This type of loan allows potential homeowners to borrow the required deposit amount from a lender, which can then be used to secure a mortgage.
This option is particularly attractive to those who are struggling to save up enough funds for a deposit, as it enables them to purchase a property sooner rather than later. However, it is crucial to bear in mind that these loans often come with higher interest rates compared to regular mortgages, which can make them more expensive in the long run.
Additionally, some lenders may require that you provide a larger deposit if you have taken out a loan for the mortgage deposit. This is because borrowing money for a deposit can be viewed as a higher risk by lenders, as it increases the overall amount of debt that the borrower will be responsible for.
Despite these potential downsides, obtaining a loan for a mortgage deposit can still be a viable option for many. It is important to weigh up the pros and cons of this choice carefully, taking into account your personal financial situation and long-term goals.
Seeking the advice of a reputable financial advisor or mortgage broker can also be beneficial, as they can offer valuable insights and guidance on the best course of action to take.
How much is the deposit if I’m buying-to-let?
If you wish to purchase a property with the intention of renting it out, you may need to provide a higher deposit amount. Most lenders require a minimum deposit of 25% of the property’s value for a buy-to-let mortgage.
However, some lenders may require a higher deposit depending on your financial situation as well as the property’s location. It’s crucial to remember that lenders may also consider the rental income from the property when determining the required deposit.
What else affects the deposit needed for a mortgage?
Another factor that can affect the amount required for a mortgage deposit is the type of mortgage you are applying for. For example, if you are applying for a Help to Buy Equity Loan, you will only need a minimum deposit of 5% of the property’s value, as the government provides a loan of up to 20% (or 40% in London) of the property’s value.
However, it’s important to note that this loan must be repaid eventually and that the percentage owed to the government may increase depending on the property's value at the time of repayment. On the other hand, if you are applying for a self-build mortgage, you may need a higher deposit as self-build mortgages are considered higher risk by lenders.
Your overall financial situation can also affect the deposit amount required for a mortgage. For example, if you have a higher income, a good credit score and a stable employment history, lenders may be more willing to offer you a mortgage with a lower deposit amount.
On the other hand, if you have a lower income or a poor credit history, lenders may require a higher deposit amount to offset the risk. It’s also important to remember that the deposit is just one of the many costs associated with buying a home. Other costs include conveyancing fees, stamp duty (if applicable), survey fees, and other expenses.
As a general rule of thumb, it’s advisable to have at least 5-10% of the property’s value saved up for these additional costs.
As always, it’s important to seek professional advice and do thorough research before committing to a mortgage, no matter what the terms may be and what level of deposit you are able to commit to.
Can I use the equity from my current home as a deposit for a new mortgage?
Leveraging the equity that has built up in your current home is one of the most prevalent methods for acquiring a deposit.
By utilising this equity as a deposit, you’ll be able to significantly reduce the amount needed to borrow for a new mortgage, which will effectively lower your loan-to-value ratio. This provides you with access to a much wider range of mortgage products, which is always a positive thing.
Borrowers with a lower LTV ratio will normally be eligible for the most affordable mortgage options, and will typically pay less per month.
How our solicitors can support you with a property transaction
At Bird & Co, we know how significant your home purchase it. Our team possess a wealth of experience in this field, which makes us primed and ready to answer and advise on any queries you may have regarding mortgages or conveyancing. We take a proactive approach and take action quickly and will do our utmost to make sure you are informed of every available option that you have regarding your circumstances.
You can be fully assured that we will maintain open communication with you, ensuring that you are fully informed about developments and any action required from your end. Our track record speaks for itself, we have numerous successful completions, particularly where challenging scenarios or tight deadlines have arisen.
First time buyer home deposit calculator
Are you a first-time homebuyer looking to save up for your dream home? Our mortgage deposit calculator can assist you in determining the amount of money you'll need to save to achieve your goal. We factor in various aspects such as the location of the property, expenses involved, household income, and monthly expenditures to determine the monthly amount you'll need to save.
As you progress, you can modify the criteria to get a better understanding of what changes you can make to reach your goal quicker.
Speak to one of our conveyancing solicitors
If you’d like to speak to one of our conveyancing solicitors, please get in touch by calling 01476 372 046 or filling in our easy-to-use enquiry form.
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