One of the first steps in getting on the property ladder and easily one of the biggest hurdles is raising the deposit. The size of your deposit will determine how much your home loan will cost. Here’s our guide on how much you need to raise before you buy.
The minimum deposit
Typically the minimum amount you’ll need is 5% of the property value and the lender would then lend you the rest provided you meet their affordability criteria. However, you’d be limited to the number of lenders and mortgage deals available to you and it can be harder to get approved for, as there is a higher risk for the lender. You’ll need to prove that you can keep up with the monthly repayments so a good credit score is important. Lenders will also look closely at affordability, to see if your wage can cover mortgage repayments and still leave you with enough to live on.
Most people aim to save at least 10% deposit, as there are more mortgage deals available and from a wider range of banks and building societies. According to a 2015 Which? National property survey, first-time buyers in the UK save an average 17% deposit.*
A deposit of 25% will open you up to even better mortgage deals and rates and you’ll be more favourable/attractive to banks and lenders.
Essentially, it’s best to remember this rule of thumb;
The more you can put down towards your deposit, the more likely you are to get a
cheaper mortgage rate.
Here’s an example:
If you wish to purchase a home valued at £300,000, you will need to have saved £30,000 for the deposit to get a 90% mortgage. If, however, you managed to save more, say £60,000 (20%), you’d get an 80% mortgage covered by the lender. This is the Loan to Value (LTV) ratio and will mean your monthly mortgage repayments are much smaller.
There are of course other important factors that affect the interest rate you’ll be able to get, like your credit score.
What about no deposit?
Hundred percent mortgages are available as of this year, where you borrow the entire cost of the house. The number of products like these has been on the rise since the 2007 financial crash. These types of mortgages normally require a family member to act as a guarantor who will commit/be liable to making the payments if you are unable to.
There are risks involved with 100% mortgages, which should be taken into account before considering them. The biggest risk is that you can fall into negative equity. This is when you have a mortgage debt bigger than what your property is worth, which can happen if the value of the house drops. Negative equity can make it harder for you to move house or remortgage.
The other risk is that the interest rate can be higher, making it harder for you to repay. Since there is no deposit being paid, a 100% mortgage poses a greater level of risk to lenders as well, so they tend to increase the interest rate for the borrowing.
The government Help to Buy scheme can help those struggling to save and can make it easier to get a 5% deposit mortgage. However, this scheme ends in December 2016. To find out more click here.
The best advice when saving for a mortgage is to start saving early and remember the rule of thumb (scroll up if you’ve already forgotten this).
* Which?, December 2015 http://www.which.co.uk/news/2015/12/average-first-time-buyer-deposit-reaches-36000-424641 /