Your mortgage deposit explained

How much you need and how to save up for it

You’re ready to buy your first property and know you need a mortgage. But how much deposit do you have to put down?

Generally, you need to pay a deposit of at least 5% of the purchase price as you should be able to borrow 95% of the property’s value, depending on your mortgage deal. So if you’re looking at a property that’s worth £150,000, for example, you need to have £7,500 ready to pay as a deposit.

That being said, it’s best if you can save a bigger deposit. This not only gives you the opportunity to choose between more mortgage deals but also gives you a lower interest rate.

Paying a higher deposit

Lenders favor bigger deposits as they consider you to be a lower risk than if you simply pay the minimum requirement. The more you pay, such as 10% or 15%, the easier it is for you to find a mortgage. This is because more options become available and, usually, the mortgage deals have better rates.

A higher deposit also means you don’t need to borrow as much so have lower monthly payments to make for your mortgage. Sticking with a 5% deposit, you’re likely to have a higher interest rate too. This means that you eventually pay more over the mortgage term.

If you can pay a deposit of 35% or 40%, you can access the best mortgage deals. If you’re already a homeowner and want to remortgage, this applies if you have this amount in equity.

A buy-to-let mortgage

To purchase a property you intend to rent out rather than live in, you need to pay a higher deposit. This is about 25% of the value of the property. In just the same way as applying for a residential mortgage, the more deposit you can pay for a buy-to-let mortgage, the more mortgage options become available for you to choose from.

A zero deposit mortgage

It’s very unlikely to get a mortgage without paying a deposit nowadays. While 100% ofF mortgages used to be common, the lowest deposit deals now tend to be for 95% mortgages with a deposit requirement of 5%.

If you’re lucky enough to have someone, such as a family member, to provide security in the form of equity or cash, then you may be able to secure a 100% mortgage with some lenders.

Getting help with your deposit

There are a couple of ways you can get help with your deposit if you haven’t already saved what you need.

A gifted deposit

As the name implies, this means the deposit is given to you, usually by parents looking to help with your first-time purchase. This is not usually a problem with lenders. They may want confirmation, though, that the family member gifting the deposit understands they cannot claim the money back and won’t have any rights concerning the property.

Help to Buy scheme

When looking at a new build, the government can provide assistance with its Help to Buy scheme. You still need to pay a 5% deposit but the government will pay 20% on top of that. This means that you only need to take out a 75% mortgage. Even better, the 20% equity loan is interest-free for 5 years.

Tips for saving a deposit

It may seem daunting trying to save for a deposit. However, there are many things you can do to make it easier.

• Pay yourself: Just as though you are paying a bill, pay yourself a set amount of money each month. It’s best to do this as soon as you’re paid to make sure those funds are squirreled away. It also helps to pay into a separate account so the money isn’t likely to get used for anything else.
• Budget: Cut back on some of your normal expenditures and put that money aside to help build up your deposit. For example, reduce the number of takeaways you order, prepare lunches at home to cut back on shop-bought ones and spend less on treats when you do your weekly food shop.
• Use an app: If you’re not good at budgeting or saving, use an app to help you. There are many free savings apps to choose from. They can analyse your spending habits, set savings goals and automatically save money for you.
• Help to Buy ISA: As a first-time buyer, you can take advantage of having a Help to Buy ISA provided that you opened an account before 30^th November 2019. At that point, the scheme was closed to new accounts. For an existing account, you can continue to use it until November 2029. The Help to Buy ISA lets you save up to £200 per month. These savings are boosted by a 25% bonus (up to £50) from the government. You can receive a maximum bonus of £3,000 once you have saved £12,000.

• Lifetime ISA: Save up to £4,000 each year with a Lifetime ISA (LISA) and receive a 25% bonus from the government. The returns from a LISA are free from capital gains tax and income tax. You need to be 18 to 40 years old to open a LISA. You can use the funds to purchase your first property. If you withdraw your money beforehand for any other reason, you must pay a penalty of 25%.

Other costs to consider

As well as saving for your deposit, there are other outgoings you need to be aware of when buying a property. These include your solicitor’s fees, the lender’s fees, the survey fee, the stamp duty, and removal costs.