If you’re considering purchasing your first property and haven’t previously taken out a home loan, you’ll need to know how deposits work, including how much to save.
Why do I need a mortgage?
As you’ll appreciate, lenders need a deposit as security or assurance on the money they advance to you. Few lenders offer 100% mortgages, and where they do you’ll typically need a guarantor to take responsibility for paying the mortgage if you’re not able to.
Additionally, it’s a riskier way of buying a home, since if prices crash you’re more vulnerable to negative equity, i.e. of your property becoming worth less than the sum borrowed.
However, because mortgages are typically offered at up to 95% of loan-to-value, you can get on the ladder with just 5% of the purchase price, while a mortgage pays off the rest.
You can do this because the government announced a new mortgage guarantee scheme in April 2021 to which several banks have signed up, offering 95% home loans.
(And, by the way, loan to value is simply the percentage of borrowing taken out against a property. So, for example, with a £180,000 mortgage on house valued at £200,000, the loan-to-value ratio or LTV is 90 %.)
As a quick guide, for a property worth £200,000, a 5% deposit would be £10,000, a 10% deposit £20,000 and a 15% deposit £30,000.
Of course, you should be able to get a better mortgage deal with a larger deposit.
How much will I need to save?
To work out the sum you’ll need to save for a deposit on your home loan, bear two key things in mind: monthly repayments plus average property prices.
Mortgage rates are changing rapidly. And the best deal for you may not necessarily have the lowest interest rate. There are various other things to take into account, including early repayment and upfront fees, plus the length of the mortgage term – or the number of years it will take to repay the home loan.
If you don’t think you can meet the repayments, you’ll need either to get a bigger deposit together or consider other ideas, such as guarantor mortgages.
Average property costs near you
All the major property websites, like Zoopla or Rightmove, provide a general idea of an area’s property values. Equally, you can also talk to nearby estate agents. The latter shows asking prices, which could be slightly more than the properties’ true values.
If you go online to the Land Registry’s price paid tool, you’ll get a clearer idea of the sums for which local properties have been sold.
Should I save for a larger deposit?
As a first-time buyer, you’ll probably be after a 90% or 95% mortgage deal, so will need a 5% or 10% deposit. The bigger the deposit you can put down, the less of a risk you represent to the lender and the more deals you’ll be able to access, meaning you’ll be able to enjoy lower interest rates.
On the other hand, house prices could rise while you’re saving for a bigger deposit. Meanwhile, you’ll probably be paying rent, which many see as a false economy and wasted expenditure.
Can I borrow my deposit?
This can be challenging. Lenders could be reluctant, while mortgage providers are generally not keen to approve deals based on a lent deposit. So, think carefully before proceeding – it’s far from ideal. And, by the way, you won’t be able to put your deposit on a credit card either.
How can I raise a deposit?
While it can feel like hard work, there are things you can do, including help-to-buy schemes, lifetime ISAs, regular savings accounts, budgeting apps or moving in with parents or into a flat share while you save.
If your family helps out, this is a gifted deposit in which the relative helping you doesn’t get a stake in the property. It can give you access to better home-loan deals.
What if I’m self-employed?
Rightly or wrongly, you’re generally perceived as posing a greater risk to mortgage lenders if you work for yourself. However, with a healthy set of accounts, you should be able to benefit from the same deals as a staffer. As ever, if you can manage a bigger deposit, you’ll be in a stronger position.
For more information on subject, read our guide to mortgages for the self-employed.
What other support is on offer?
It’s worth looking into shared equity schemes, while some lenders offer specialist mortgages for first-time buyers, minimising the deposit.
- At Mortgage Centre Online, we’re experienced, Bristol-based home-loan advisers providing high-quality mortgage and other financial advice you can trust. Let us help whether you’re moving, a first-time buyer or releasing equity. Benefit from our personable and professional yet friendly approach. Get in touch today.