How much deposit do you need for a mortgage?
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How much deposit do you need for a mortgage?
Joanne is here to talk to us about a deposit for a mortgage and how much you might need.
Podcast approved by The Openwork Partnership on 19/6/2024.
What is a mortgage deposit and how does a mortgage deposit work?
When you look to get a mortgage, as a rule you will put a deposit down. There are some exceptions, which we will come to, but generally you put a deposit down and then the lender will lend you the balance of the property cost.
So you save up, put some cash down and the lender provides the rest of the amount that you need to purchase the property.
How much deposit does someone need for a mortgage? How much should they save?
This is quite variable. As a minimum you will need 5%. But the more you save, the more lenders are potentially available to you – and depending on your credit score, the better the rates available as well. Lenders will be happy, because a larger deposit means less risk to them.
What is the average First Time Buyer deposit?
It’s pretty common to see First Time Buyers put down 5% – because properties are so expensive these days. It’s really hard for people to get on the ladder now. So a 5% deposit is pretty much the norm. Some do manage to get to 10%, but it all depends on the size of property you want to buy.
What does a bigger house deposit mean for Loan to Value?
To explain what Loan to Value is, let’s imagine you’re buying a £100,000 house. You’re putting a 5% deposit down which is £5,000. You would be borrowing at 95% Loan to Value (LTV). It’s the amount you’re borrowing against the price of the house.
The bigger the deposit, the lower the LTV. If you can put a 20% deposit down, you only need to borrow 80% of the value of the property. The higher the deposit, the better the rate.
If you’re only borrowing 80% of the value of the property, the lenders won’t credit score you as strongly. They’ll be a bit more relaxed because you’re a lower risk, and will offer you a better rate. A 5% deposit will have the highest rate.
Why do I need to save a house deposit? And how can I save for a deposit?
You’ve got to budget and you’ve got to have a separate account. Because if you try and save within your normal current account, it’s probably going to get spent on a weekend away or a night out.
Set yourself a goal. Do a budget planner and look at what you can realistically save. Also, look at getting a Lifetime ISA. A lot of people know them as a Help to Buy ISA, but they now have a new name. With a Lifetime ISA, the government will help you.
You can get them from high street banks and the government will give you a bonus each year – so they help you contribute towards your deposit. Be strict with yourself, because it is really hard to get that deposit saved up.
Is it possible to get a mortgage with zero deposit? Can I get a 100% mortgage?
Yes – so you should always work on the basis of needing a 5% deposit. We’ll touch on credit scores in a moment – while they’re separate to this they go alongside it.
A 100% mortgage is possible, but not everybody’s going to be eligible for it. So people mustn’t think that this is something they can do. People do often think that because they can afford to pay their rent every month, they can afford a mortgage. They just haven’t got enough left over to save for the deposit, and that’s what’s holding them back.
Because of this, one particular building society has brought out something called a Track Record Mortgage, specifically for people who rent. It’s a fixed product for five years, where you’ve got to be 21 or over and to have never owned a property. You’ve got to have a very good credit score.
That can be an issue for a lot of people. If you’ve missed a payment or been late on a payment, you’ve got any blips on your credit record, they’ll just say no.
The mortgage affordability is based on the rental paid in the last 12 months. You’ve got to prove that you’ve paid it on time. You can then borrow the equivalent amount of rent on your mortgage payment. So, if you’re only paying £300 a month rent because you’re getting mates’ rates, this is not going to work for you. You won’t be able to borrow much based on that rental payment.
But if you do qualify, you don’t have to put a penny down for a mortgage. They are looking for people that are squeaky clean, that have been renting consistently and paying the rent on time – it’s a particular market of people.
Can you buy a house with a 5% deposit?
Yes, you can. But with a 5% deposit you need to have squeaky clean credit. If a lender’s going to lend you 95% of the value of a property, you’re quite a high risk. As we’ve seen in the last two years, properties can go down in value as well as up.
They might lend you £200,000, and within the next five years that property could drop 6% in value. If that were to happen you would be in negative equity, which means the lender’s at risk of losing money. They want you to be squeaky clean, so you’ve got to tick a lot of boxes.
One way young people, especially those aged 18-21 – can struggle is that they have no credit history. So it’s really hard for lenders to judge them. They can be treated sometimes as if they have bad credit because they’ve got no credit. Lenders just don’t know how they’re going to behave with a 95% mortgage at a young age.
So you’ve got to build a good credit file. You’ve got to pay your bills and get your credit score up. If the bank offers you a credit card, take it, but be sensible. Even if you only spend £10 on it, make sure it’s paid off in full at the end of every month. When you’re not using all your credit and you pay it off straight away, that will give you points.
It will help you towards getting a 5% deposit. Put everything on direct debit and pay things on time. There are little tricks – for example if you get paid in the middle of the month, have your bills come out after you’ve been paid. Don’t have something going out on the 12th of the month when you’re not paid until the 15th – that will make sure you’re not ever going to miss a payment on anything.
If you’re saving for eight years to get a 5% deposit and then you have a little blip on your credit file, a lender might come back and they now need a 15% deposit – because you’re a higher risk. You don’t want that.
Is it really a good idea to get a credit card to boost your score?
Yes, it does help as long as you’re sensible with it. I’m nervous about signposting people to get a credit card. There’s always a chance that once they get that £1,000 limit, they might see it as free money and go and buy something for £800.
They tick the box to say they’ll make a minimum payment, so they might be paying £20 a month on a direct debit. You might think that’s all right, but it won’t be good for your credit score.
If you’ve spent £800 of a £1,000 limit, you’re using 80% of your available credit and only paying the bare minimum. If you’re not making any effort to pay it off, you’ll get scored down.
I always advise people just to put their petrol on it every month. Make the full payment every single month to pay it off in full – that gets you points and wins you your 5% deposit.
Can you get a mortgage with a 10% deposit?
You can. A 10% deposit will be a little less focused on the credit scoring and you will get a slightly better rate. The lenders will look at you more favourably and they might not want as much documentation.
To them, risk goes down in 5% deposit increments – and 60% is the lowest. You can’t get a better rate under 60% Loan to Value, and with some lenders that’s 65%. You could put an 80% deposit down but the best rate will be the same as with a 60% or 65% LTV.
Will you need another deposit when moving house?
Not as a rule. Once you’re moving house, you should have equity in your current property. Imagine you’ve bought a house with a 5% deposit, you’ve had it a few years and paid your mortgage every month. The mortgage payment is made up of both capital and interest. If your payment is £500 a month, perhaps £250 is paying off the interest and £250 is paying the actual loan.
Hopefully, the property’s risen a little in value since you bought it. You put in 5%, you’ve paid your mortgage each month and then with the increase, you might have 15% to 20% sitting in it as equity.
You might be selling a house at £200,000 and want to buy one at £300,000. You can use that equity against the new house. Depending on your budget and affordability, you may need to put extra down. So the answer is yes and no depending on your situation, circumstances and affordability.
It’s down to individual circumstances. Somebody might have a house with £50,000 of equity and they are buying a property at £250,000. But that new house needs a good £20,000 spending on it for a new bathroom and kitchen. They need to consider how it would feel to save up for a new bathroom and kitchen and how long that would take while paying a mortgage.
Where it’s suitable, we can tailor the mortgage around the client. They might put a 10% deposit down on the new home of £25,000, and keep £25,000 back to make the improvements. A new kitchen and bathroom will also increase the value of that house and improve the equity straight away.
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Who do I pay a mortgage deposit to?
It’s paid to your solicitor once all the conveyancing has been done in the background. Once everybody’s happy and all parties have signed contracts, you’ll get a call from a solicitor arranging completion dates. You’ll get a completion statement, part of which will be deposit monies.
These are then transferred over to the solicitor, usually a few days before completion and then they draw the monies for the loan from the lender and pay it all onwards to the vendor’s solicitor. It can be a massive chain of people moving house, or it could be a First Time Buyer with nobody else in the chain. Either way, it’s all down to the solicitors and the conveyancing process.
Can my parents contribute towards my deposit?
Absolutely, yes. They can do it in a number of ways. I’ve had a lot of clients that have bought their parents’ house at a discount. Say the house is worth £200,000, they sell it for £180,000 and therefore use that £20,000 as a virtual deposit for the child.
Or, parents can give a cash gift. Some lenders allow anyone to give a gift – it can be somebody’s aunt, uncle, brother, daughter or family friend. It’s just got to be proved for money laundering purposes. But most lenders will want a gift to be from immediate family – mum, dad, grandparents etc.
If you’re borrowing it and it’s not a gift, we’ve got to take that into account as a loan being paid back. You need to be careful on that, because it can affect your affordability.
Can I use a loan for my mortgage deposit?
Believe it or not, you can, but only one or two lenders allow it. It has been done with a couple of my clients over the years so we know which lenders to approach. As long as it fits within affordability, it can be done with the right lender.
Can I use a Help to Buy ISA for a deposit?
You can’t open Help to Buy ISAs any more. These are now a Lifetime ISA, which can be used for either a pension or property purchase. Anybody with a Help to Buy ISA can still use it, though.
An important factor is that Help to Buy ISAs don’t have to be used on new build properties. This is sometimes confused with a Help to Buy equity loan, which was only for new builds, but you can use the ISA for an older property too. The government still honours these, it’s just that you can’t open them now – it has to be a Lifetime ISA.
Will a bad credit score mean that I need a larger deposit?
Potentially, yes. Some high street lenders will decline an application if they see something on the credit file that they don’t like. Some will come back and offer an alternative lending solution – perhaps taking the deposit from 5% deposit to 15% deposit due to the credit issue.
We do have what we call sub-prime lenders, and certain high street lenders will also allow a few things on the credit file. Some will still allow a 5% deposit – but you are going to pay a much higher rate, because you’re more risky to them.
So where a rate might have been 5%, you might have to pay 6.5% or 7%. [podcast recorded in May 2024]
It will come down to whether you have more deposit available to potentially go with a high street lender. It also depends on what’s on the credit file – is it a straight no with a high street lender? If so, we go down the route of a lender that specialises in low credit scores and low deposits.
I usually request a credit file to see what’s going on in the background and if there’s anything we need to be aware of. Could there be a late payment, or something more serious that we were not aware of?
What size deposit is needed for Buy to Let mortgages?
It’s a bit of a jigsaw puzzle. As a rule, we always work on a 25% deposit, although there are lenders that will accept 20%.
The loan for a Buy to Let property isn’t worked out based on your income, but you might need a certain income to access some high street lenders. With TSB, for instance, you need a basic income of £25,000 for their Buy to Let products, while with other lenders you don’t have to be earning anything.
The mortgage is worked out on the rental that the property will achieve. Because rates have gone up, lenders built in a buffer – a calculation where the rent needs to cover 135% of the mortgage payment or, in some cases, 145%.
Because rates have gone up, a 75% Loan to Value on a property isn’t quite fitting that calculation at the moment in the North West, where we are. On an average two-bed terrace or a flat with a mortgage of around £120,000 with a 25% deposit your rental should fit the loan that you need. But when you start going up to £200,000 houses, the rent is not enough for a loan at 75% LTV. [podcast recorded in May 2024]
It’s complicated, so work on 25% as a rule – but talk to a broker before you make any decisions.
What is shared ownership and what deposit do I need for it?
A lot of new builds are shared ownership, where you will buy a percentage of a property such as a 50% share.
So if a house is worth £200,000, on your affordability you might be able to get a mortgage for £100,000. A 5% deposit for that would then be £5,000 and you would borrow £95,000. The other £100,000 share is owned by the builder or a housing association and you pay rent on that portion.
Personally, I’m not a huge fan. If you want to ‘staircase’ up and increase your share by another 10%, 15% or 20%, there are rules around minimum amounts, and it can be costly on the remortgage to buy the additional shares. It’s not just a simple remortgage – you have to get valuations done. It’s also hard to get out of, sometimes, once you’re in it.
What is Deposit Unlock and what deposit do you need for that?
This is a new one, sort of replacing Help to Buy since it finished. It’s just for new build properties and it’s a 5% deposit scheme.
As a rule with new builds, you can usually only borrow up to 85% because a new build house is a bit like a new car – as soon as you get the keys and move in, it can drop in value.
If you buy a new build home for £250,000 and you don’t like it after six months and want to sell, next door could still be for sale brand new. Why would somebody want to buy a secondhand property for the same amount or more, when they can buy it brand new for the same amount?
The lenders, as a rule, have never lent up to 95% on a new build. But with Deposit Unlock it’s now possible. It’s only with participating builders and selected lenders at the moment, but I’m sure more lenders will come onto the panel as it’s a brand new scheme.
You can be a First Time Buyer or an existing owner that’s moving house. You’ve got to be accepted by the builder and the broker you go to has to be qualified, as well. The builder chooses the plots that Deposit Unlock is available on, and it might not be every plot.
It’s been brought out, I imagine, because the sale of brand new homes have slowed down since Help to Buy finished.
Are there any other helpful schemes at the moment?
Another scheme has come out called a £5,000 deposit mortgage. One lender has brought this out and it basically offers up to a 99% Loan to Value. It’s only for First Time Buyers and the £5,000 can be a gift.
It’s for properties from £100,000 to £500,000. So even if you’re buying a £500,000 property you can put a £5,000 deposit down – in theory, you’re getting a 99% mortgage.
It’s not available on new builds, only on older houses, and you’ve got to have a five year fixed rate mortgage.
So if you want to buy a £180,000 pound house but you’ve only got a £5,000 deposit, as long as you tick all the boxes, you might not have to put a £9,000 deposit down on that home. As long as you fit their criteria, they’ll lend you the money with just £5,000.
How can a mortgage broker help with deposits and the property process?
Brokers are here to help. We have a lot of knowledge and deal with a lot of lenders – and they are all different. People often pick up the phone to their own bank because they’ve been with them for many years. They may offer you a mortgage, but are they the cheapest?
Everybody’s different on any given day. Today TSB could have the cheapest mortgage product, but tomorrow it could be Santander. We know who’s cheapest on the day because we have a sourcing system.
I’ve had many clients over the years that have gone into their local branch and been turned down for a mortgage. They’ve felt deflated and have given up. It could be five years later that I speak to them – but I could have found them a deal at the time.
So if you get a no, don’t ever be deflated. Speak to a broker. We’re the specialists and we know what we’re talking about – including all these new products and schemes. We might just have the right solution.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
Approved by The Openwork Partnership on 19/6/2024.
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