How much deposit do I need to buy a house?

For anyone who dreams of owning their own house, those dreams usually start with saving for a deposit. In this article we look at the importance of a deposit in the house buying process. How much do you need? How can you save more? Can you get a mortgage without one?

What is a deposit on a house?

A deposit is the amount of money a first time buyer needs to provide from their own funds before applying for a mortgage. This is the equity you will have when you first buy a house. Generally the minimum deposit accepted by mortgage lenders is 5% of the property price. So if the house costs £200,000, your deposit is £10,000.

How to save for a deposit

We know it is not easy saving for a deposit. For example, if you are planning to buy a house by the time you are 30, saving thousands of pounds during your 20s can seem impossible. If you are living with parents and earning an average salary, this should be achievable. If you are already renting a property, it will mean making compromises elsewhere but can be done.

If you look to save 1/5 of your disposable income each month, gradually your deposit fund will grow. Try to find savings accounts that pay a good rate of interest, or use a Lifetime ISA (LISA). With a LISA the government will add an annual bonus of 25%, on savings of up to £4,000 per year.

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What is loan-to-value LTV?

Loan-to-value (LTV) is the percentage your mortgage borrowing represents of the value of the property you are buying. The higher the LTV, the harder it will be for you to get attractive mortgage deals. This is because the risk for a mortgage lender is greater if the value of the property falls and you default on the mortgage.

So the more deposit you are able to save the better LTV you will achieve. However, first time buyers will still usually have a high LTV.

Can I get a mortgage with no deposit?

Yes, but a 100% mortgage is only available with a limited number of mortgage lenders. To apply you will need a good credit history and a guarantor. A guarantor offers their property as security against a percentage of the mortgage. This means that the guarantor will have to pay for any shortfall if your home is repossessed and sold by the lender.

Reasons to save a bigger deposit

Although 5% is the minimum deposit most mortgage lenders will accept, the more you can save the better options you will have as a borrower.

Cheaper repayments & better deals

A larger deposit will mean the amount you have to borrow will be smaller, so your monthly repayments will be lower. You are also going to have better mortgage deals to choose from, because you will not represent as great a risk to the lender as someone with a smaller deposit.

Improved chance of acceptance

Mortgage lenders are more likely to approve your application if you have a larger deposit, as you will have a greater chance of affording the monthly repayments than if you have a smaller or the minimum deposit.

Less risk

A larger deposit means less risk for mortgage lenders. Negative equity is the fear for all banks and building societies – where the property is worth less than the amount owed to the lender. If the value of property falls, you will own more of your own house if you have a larger deposit.

Options to help with your deposit

Do not despair if you are still struggling to save enough for a deposit. There are a number of options available that can help boost your funds.

Help-to-Buy

Help-to-Buy is a government scheme offering assistance to first-time buyers to buy a new build-property with a small or the minimum deposit. Buyers receive an equity loan of up to 20% of the property value, in addition to their mortgage. The loan is interest only, but borrowers are not required to start paying interest for five years after they buy a house.

There is strict eligibility criteria and a maximum property price for each region. Buyers in London can receive a Help to Buy equity loan of up to 40%, rather than the standard 20%.  The current Help to Buy scheme runs until March 2023.

Shared ownership

Shared Ownership gives you the chance to buy a share of a house and pay rent on the remaining share. If you can afford to, you can buy larger shares further down the line. Here are some key facts about Shared Ownership:

• To be eligible you must have a household income of £80,000 a year outside London or £90,000 within London
• Your share of the property can be between 25% and 75% of the property’s value
• You can be a first-time buyer, an existing shared owner wishing to move, or you can use the scheme if you owned a home but cannot afford to buy a new one
• You can buy a new build or an existing property
• Shared Ownership properties are always leasehold

Buy a house with friends

Say hello to the house share with a difference. As property prices have gone up, buying with friends has become increasingly popular. If you’re single and can’t afford to buy a property on your own, or even as part of a couple, clubbing together and jointly owning with people you know (and like) can work.

It probably won’t last forever, but it will give everyone with the shared mortgage a chance to get on the property ladder. You will need to prepare a cohabitation agreement or deed of trust to establish exactly how the property is divided, and what will happen if one of the parties wants to move out or sell their share.

It is also worth bearing in mind that all parties in a joint mortgage are ‘jointly and severally’ liable for the mortgage debt.

Help from parents or family

Research conducted by Legal & General in 2020 revealed that 49% of home buyers under 35 received financial assistance from their parents to buy their first property. There are a number of ways the ‘Bank of Mum & Dad’ can help you buy your first home, or even as you move up the property ladder:

• A financial gift (gifted deposit)
• A loan
• Putting your savings in a linked account
• Acting as a guarantor on a mortgage
• Getting a joint mortgage

Lifetime ISA

A Lifetime ISA (LISA) is an individual savings account that will help you save in order to buy your first home. With a LISA the government will add an annual bonus of 25% on savings of up to £4,000 per year. You can put money into your LISA up to the age of 50. After this point your account will continue to accrue interest but will not receive the 25% bonus.

To open a LISA you must be aged over 18 but under 40.

Buy-to-let deposits

A buy-to-let deposit is the deposit you pay if you are taking out a buy-to-let mortgage. A minimum deposit of this kind is significantly higher than a standard mortgage, usually between 20-40% of the property value.

Frequently asked questions

When do I pay my deposit?

You normally pay your deposit at exchange of contracts. This acts as security to the mortgage lender that you are proceeding with the purchase.

Who do I pay my deposit to?

You transfer the funds to your conveyancing solicitor, who will arrange for it to be paid to the seller’s solicitor when contracts are exchanged.

Can I borrow money to pay for my deposit?

It is possible to use a loan to fund a deposit if you have no other means to do so. However, a mortgage broker will look very carefully at your ability to repay both the loan and a mortgage. A loan from a family member will usually be seen as being more favourable than from a loan company.

Does bad credit affect the amount of deposit I need?

It will have an effect, yes. But you can still be accepted for a mortgage application even with a bad credit history. A mortgage lender will examine factors such as your debt to income ratio, the nature of the bad credit rating and the amount of debt involved. A recent history of stable income and employment will help your cause.

Need more information about your next mortgage

Saving for a deposit is a key step in buying your first house. If you are unsure about what you can afford, head to Just Mortgages to find out more.