Large deposit mortgage (A 3 point guide)
In this brief blog, we will cover large deposit mortgages, how to get them and what help may be available for you to get a large deposit mortgage.
As a prospective mortgage borrower you may be wondering if a large deposit will help you get a mortgage. This can certainly be the case for most mortgages as large deposits reduce the mortgage lenders loan to value and in essence reduces the mortgage lenders risk on the mortgage.
what is a large deposit mortgage?
A large deposit mortgage could differ in meaning from one mortgage lender to another. The typical mortgage deposit requirement is around 5% these days so anything above that may be considered a large deposit mortgage for some mortgage lenders.
Typically the mortgage deposit required by most mortgage lenders was 20% so a large deposit mortgage could be one where you pay anything above 20% as a mortgage deposit.
There is no need for you to put down a larger mortgage deposit than required but there may be some advantages in having a large deposit mortgage
Why should you put down a large deposit for a mortgage?
A large deposit will first of all make it easier for you to get the mortgage as you reduce the mortgage lenders loan to value rate and therefore their risk.
A large deposit mortgage may also encourage a lender to increase the mortgage multiple they offer to you and allow you to borrow much more than they would normally offer.
A large deposit mortgage may also be good if you want to reduce the interest rate you are charged on your mortgage as most mortgage lenders price their mortgage according to the loan to value bands that borrowers fall in.
A large deposit mortgage may also reduce the total cost of interest the borrower pays over the lifetime of the mortgage as they essentially borrow substantially less than they would have if they paid a smaller mortgage deposit.
A large deposit mortgage may also be relevant if you want to reduce the monthly mortgage repayments you will have to make or if your income is low and you cannot afford the mortgage repayments on your ideal mortgage.
A large deposit mortgage is also very essential as it encourages mortgage lenders to lend to complex case borrowers such as bad credit borrowers, self-employed borrowers, complex income borrowers, tier 2 visa mortgage borrowers, foreign national mortgage borrowers, over 60 mortgage borrowers and a lot of mortgage borrowers who may infact not be able to get a mortgage without a large mortgage deposit..
How can you fund a large deposit mortgage?
There are several ways you may be able to fund a large deposit mortgage.
If you are a first-time buyer or home mover then you may be able to benefit from the first-time buyer and home mover government schemes available which help you increase your mortgage deposit or reduce your property price which will give you the same effect as a large deposit mortgage .
These schemes include:
- Lifetime ISA– gives you a government bonus of £1,000 if you save the maximum £4,000 a year.
- Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
- Help to buy equity loan- gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
- Shared ownership- You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
- Armed forces help to buy- similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
- Rent to buy- This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
- Right to buy- allows you to buy your home at a discount price.
- Preserved right to buy– same as above.
- Right to acquire- same as above.
Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.
Your family and friends
You may also be able to fund a large deposit mortgage with funds gifted to you by your family and friends. This is known as a gifted mortgage deposit and will usually require a gifted deposit letter for the mortgage lender to review.
Not all mortgage lenders will accept a large deposit mortgage which has been funded by your family or friends. Some mortgage lenders do not accept gifted mortgage deposits at all whilst others will only accept gifted mortgage deposits from your immediate family and not from friends.
The criteria on what sort of gifted mortgage deposit a mortgage lender may accept will differ from one mortgage lender to another but most mortgage lenders will want to ensure that the gifted mortgage deposit which is used to fund the large deposit mortgage is actually a gift and not a loan which may threaten its first charge mortgage on the peperty and create complications if they have to repossess the home in the future.
Most mortgage lenders will want to review and approve all communications in regards to a gifted deposit.
You should also seek independent financial advice before signing on and receiving a gifted mortgage deposit.
Aside from gifting you a mortgage deposit your family members may also be able to help you with a family deposit mortgage or otherwise known as the family springboard mortgage, they include mortgages from lenders such as the Barclays family springboard mortgage, the lloyds lend a hand mortgage or the post office family link mortgage.
In this case, your family members or friends will simply need to put around 10% of the property price away in a linked savings account with your mortgage and this will allow you to get a mortgage with a 100% loan to value.
Sale of a property
You may be able to use the sale of a property to fund your large deposit mortgage. Most mortgage lenders will want to see proof of your mortgage redemption statement and proof of funds entering your bank account as proof of your mortgage deposit and as a means to verify the source of your mortgage deposit.
Investments & savings
You could also use funds from your investments to fund your large deposit mortgage as long as these funds have not put you in any financial risk or issues. The mortgage lender may want to see an investment statement or proof of funds hitting your account from the investment platform or manager as a means to verify your source of mortgage deposit.
If you are using your savings to fund your large deposit mortgage then you will simply need to provide a statement from your savings account showing how the money was paid into the savings account and when it was withdrawn.
You can also use your inheritance to fund your large deposit mortgage as long as you are able to prove where the money has come from to the mortgage lender. A letter from the estate which paid you the inheritance should be sufficient proof for the mortgage lender.
Lottery winnings or gambling
Not all mortgage lenders will accept lottery winnings and gambling income as source of mortgage deposit but there are mortgage lenders out there who are happy with this and you could use your lottery winnings and gambling income to fund a large deposit mortgage.
Will a large mortgage deposit guarantee a mortgage?
Having a large mortgage deposit isn’t the only factor that mortgage lenders consider when looking at your mortgage affordability to see if they may be willing to lend to you and how much.
Different mortgage lenders have different mortgage eligibility requirements and whilst some may favor a large mortgage deposit over every other factor it is unclear which mortgage lenders do this as they do not share their internal scoring criteria with the public.
This means aside from putting together a large mortgage deposit you may still want to ensure that the other parts of your mortgage affordability are in a good shape.
Here are other factors most mortgage lenders will consider before making a lending decision:
The property type
Mortgage lenders like to lend on property types which are easy to sell if the property is repossessed and properties which their future value and structural state can be predicted. If you have a non-standard construction property then you may find that you will have to put down a larger mortgage deposit to get a mortgage. The mortgage the lender may be willing to lend to you may fall and you may find mortgage rates which are not competitive.
Your income is still a major part in deciding if a mortgage lender will lend to you and how much they may be willing to lend to you. Most mortgage lenders operate with mortgage multiples which they use to decide how much mortgage you can reasonably afford per month from them and the typical mortgage multiple is around 3.5. You could potentially get a mortgage multiple of 6 times your income but you will almost certainly have to put down a larger mortgage deposit.
As long as your monthly disposable income can cover the monthly mortgage repayments on the mortgage size you are after and still have some room left then you may be willing to find mortgage lenders willing to offer you a mortgage.
Your credit score and history
Your credit score and history is a very important element that mortgage lenders use to decide how much they may be willing to lend to you.
If you have bad credit then you may find it very hard to find mortgage lenders who may be willing to lend to you.
Putting a large mortgage deposit down will go a long way toward convincing the mortgage lender to take a risk with you as you essentially limit the mortgage lenders risk in the mortgage with a lower loan to value.
Before applying for a mortgage you should look to build your credit score and history to ensure that you increase yourmortgage affordability and possibly the amount of mortgage lenders that may be willing to lend to you.
You can build your credit history and score by doing the following:
Open a bank account
Avoid missing credit repayments
Avoid late payments
Avoid taking out payday loans
Get a credit builder card or loan
Avoid making too many credit applications in a short space of time
Keep your credit utilization below 30%
Keep your credit accounts open for as long as you can
Most mortgage lenders will want to lend to borrowers who will finish their mortgage term by the time they are 75. If you are much older and you want to get a mortgage which will finish after you are 75 years of age you may find a limited choice of mortgage lenders to choose from.
Increasing your mortgage deposit may go a long way to increasing your mortgage affordability to these mortgage lenders.
In any case, there are also mortgage lenders who will be willing to lend to borrowers whose mortgage term will finish way beyond the age of 75.
You may need a specialist mortgage broker to find mortgage lenders who meet your needs in this regard.
If you meet most of the mortgage eligibility requirements above then you may find that you don’t need to put down a large mortgage deposit although a large mortgage deposit has its benefits.
Will a large deposit mortgage be cheaper?
One of the key factors with which mortgage lenders base their risk is the loan to value rate with which the mortgage is on. The loan to value rate of course depicts how much the mortgage lender is lending to you in contrast to the property value and in the very first instance, in contrast to your mortgage deposit.
Different mortgage lenders will have their loan to value bands with which they operate in and the lower the loan to value band the cheaper the mortgage rate will be.
This means the larger your mortgage deposit the cheaper your mortgage rate will be.
This is not always the case as in some cases there are other factors which cause the mortgage rate to still be high e.g when a mortgage lender lends to a borrower with bad credit.
The fact that the borrower has bad credit will already qualify them for a certain mortgage rate and the larger mortgage deposit will be a requirement of the mortgage product and not something that was freely done by the mortgage borrower to reduce their loan to value rate in hopes of getting a cheaper mortgage rate.
Will a large mortgage deposit reduce my monthly mortgage repayments?
Yes, a large mortgage deposit will usually reduce your monthly mortgage repayments as a larger mortgage deposit will reduce the amount of mortgage you actually need in relation to the property price. This means you will pay interest on a smaller balance which you have borrowed and hence smaller monthly mortgage repayments.
The only exception here is if your mortgage rate is so high that it dilutes the effect of a large mortgage deposit. This could be the case if you have a specialist mortgage products such as a bad credit mortgage
Will a large deposit mortgage help me if I have bad credit?
Yes, a large deposit mortgage should help you if you have bad credit as most mortgage lenders may require you put down a larger mortgage deposit in order to reduce the loan to value rates on the bad credit mortgage.
Using a large deposit mortgage is often one of the only ways to get a mortgage with bad credit.
Bad credit could include:
A debt management plan
A home reposession
Credit account defaults
Missed credit repayments
If you are concerned about getting a mortgage with bad credit then you may want to speak to a bad credit mortgage broker who may be able to assist you in getting a mortgage.
Is it better to put a bigger deposit on a house?
Yes, in many cases it may be better to put a bigger deposit on a house as this will usually reduce the amount of mortgage interest you have to pay and reduce the size of your monthly mortgage repayments.
Can you get a mortgage with a 5% deposit?
Yes, you can get a mortgage with a 5% mortgage deposit and there are many mortgages available from mortgage lenders which allow a 5% mortgage deposit. You can also use the government’s first-time buyer or home mover schemes to help you get a mortgage if you already have a 5% deposit.
How much deposit is needed for a mortgage?
The average deposit needed for a mortgage is about 15% but these days you can see mortgage lenders who accept 5% mortgage deposits and some mortgage lenders who even accept a 0% mortgage deposit.
Use a mortgage broker for your mortgage in principle
You may want to use an independent mortgage broker to help you get a mortgage on your new home.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.
This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle.
This will allow you to shop for your home as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application.
Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.
It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.
Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.
They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer, and set a completion date with the seller or their conveyancer.
This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.