What is a mortgage deposit?(& how much do you need)
What is a mortgage deposit?
A mortgage deposit is a percentage of the property price which you pay to the property seller. You then get a mortgage on the rest of the property price.
Mortgage deposits tend to be around 5% to 20% of the property price.
With the average house prices in the Uk climbing above £300,000 you will likely need a a mortgage deposit of between £15,000 and £60,000 before you may be able to get a mortgage.
Advantages of putting down a bigger mortgage deposit?
Putting down a bigger mortgage deposit on a property has some advantages
- You may likely get offered better mortgage rates by mortgage lenders as their loan to value is now much lower and their risk is less.
- A bigger mortgage deposit means your mortgage will cost you less in interest over the lifetime of the mortgage and you will likely have smaller monthly mortgage repayments.
- A bigger mortgage deposit does not guarantee you will get a mortgage but it may increase your likelihood of getting a mortgage offer.
- Having a bigger mortgage deposit also means you will have more equity in the property and remortgaging may be much easier than if you had less of a mortgage deposit and subsequently smaller equity.
- Having a bigger mortgage deposit also reduces the possibility that you will fall into negative equity as it is more unlikely that your mortgage will become more than the value of the property.
How much mortgage deposit do you need?
The amount of mortgage deposit you may need to out down will depend on the mortgage lender. It has no bearing on the home seller and the home seller cannot dictate to you how much mortgage deposit they need you to put down.
They can only dictate how much they may want as a reservation fee or holding fee for the property whilst you get your mortgage.
Government schemes for mortgage deposits
Mortgage deposits are very hard to save in the UK as the living costs are so high and most people struggle to put away any money towards their mortgage deposit savings.
The shortage of affordable housing has also contributed to the continuous growth in housing prices and this further compounds the difficulty ofmost potential first-time buyers who are trying to save mortgage deposits.
The government has seen the difficulty in saving a mortgage deposit and has created some first-time homebuyers and home mover schemes to help you get on the property ladder.
You may be able to get some home buying government schemes for first-time buyers and home movers which could increase your mortgage deposit or reduce the total cost of purchasing the property.
- 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.
Mortgages products with no mortgage deposit
There are some mortgage products which may not require you to pay any mortgage deposit down and will offer you a 100% loan to value mortgage.
Most of these mortgages may require the help of your family members to offer some collateral such as their savings or property for a fixed period.
If you default on your mortgage repayments or miss a few mortgage repayments then your family member or friends collateral could be at risk.
This means if they have a home as collateral then they could risk having it reposessed.
They are a certain type of mortgage known as a 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.
How much mortgage deposit do you need with Bad credit?
If you have bad credit then you may potentially need a much bigger mortgage deposit as most mortgage lenders may want to reduce their loan to value rates when lending to borrowers with bad credit.
If you aren’t able to increase your mortgage deposit then you should consider building credit to improve your mortgage affordability then applying for a mortgage in the future.
There are some mortgage lenders who may be able to lend to you with bad credit but even then they may insist you put down a much bigger mortgage deposit.
Bad credit could include:
A debt management plan
A home reposession
How much mortgage deposit will you need if you are Self-employed?
If you are self-employed then you may find that you need to put down a much larger mortgage deposit. This isn’t always the case and will always be due to a particular reason.
Self-employed borrowers will usually find it very hard to prove their income to the mortgage lender and without the mortgage lender being able to know how much you earn they will not be able to give you a favourable mortgage.
Most mortgage lenders will try to reduce their risk here by offering you a lower loan to value rate and asking you to pay a higher mortgage deposit.
You may also be asked to pay a higher mortgage deposit by a mortgage lender when you are recently self-employed and you do not have a minimum of 3 years worth of accounts which most mortgage lenders may request as a minimum.
How much mortgage deposit do I have to pay on a Buy to let mortgage?
Buy to let mortgages may require mortgage deposits from 15% all the way up to 40%.
The mortgage deposit you may have to pay on a buy to let mortgage will heavily depend on your experience on with buy to let properties, the risk to the buy to let mortgage lender and if your buy to let property is income generating already or if you will need to find tenants.
What is the average deposit for a mortgage?
The average mortgage deposit you can expect to pay today is between 5% and 20% but there are now many government first-time buyer schemes which reduce the amount of mortgage deposit you need to put down.
How does a mortgage deposit work?
Mortgage deposits are just a down payment on your part when you take a mortgage so the mortgage lender is not carrying the full risk of the mortgage by giving you a loan to value of 100%.
what is a loan to value?
Loan to value means how much of a mortgage you are getting in relation to the value of a property (not its price).
Example: If a property is worth £100,000 and you get a mortgage for £80,000 on the property this means you have a loan to value of 80%.
The remaining 20% of the property price will have to be your mortgage deposit.
Loan to value is a big key for mortgage lenders when deciding on how to price a property.
The lower your loan to value the increased likelihood that you will get a better mortgage rate.
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.