Mortgage deposits: How much deposit do I need to buy a house?, by Matt Stevens
Before you’ll be able to get a mortgage, you’ll need to save up a deposit for a house. The amount of money you’re able to pay upfront will have a direct effect on how much your chosen lender will allow you to borrow, the rate of interest you’ll pay, and which houses you can afford.
House prices have been particularly high over the last couple of years and the cost of living is constantly going up, so saving a deposit for a mortgage and becoming a first-time buyer may seem impossible, but it is doable and there are also lots of Help to Buy government schemes designed to support people just like you in getting onto the property ladder. As long as you manage your expectations, set a realistic goal, make some changes to your spending habits, and accept the help available to you, we’re confident you can fulfil your dream of becoming a homeowner.
To help you with the process of saving up a house deposit, we’re going to talk you through everything you’ll need to keep in mind. Here’s what our mortgage deposit guide covers:
- What is a mortgage deposit?
- How does a mortgage deposit work?
- How much deposit do I need to buy a house?
- What is the minimum deposit I need for a mortgage in the UK?
- Can you get a mortgage with no deposit?
- What is the average deposit for a house in the UK?
- What is LTV?
- Can I get a loan for a house deposit?
- How can you save for a housing deposit?
- Gifted deposits: Can parents or relatives help to cover your mortgage deposit?
- House deposits and remortgages
- House deposits for second homes
- House deposits for buy-to-let mortgages
- Mortgage deposit calculator
What is a mortgage deposit?
When you buy a property, you’ll typically need to pay a cash deposit upfront — this is your mortgage deposit. You’ll then be required to take out a mortgage to cover the remaining cost of your home.
If you’re able to put down a larger deposit, you’ll own more of your house outright and will be able to take out a smaller mortgage. You’ll also benefit from lower interest rates and monthly repayments.
How does a mortgage deposit work?
When you pay your mortgage deposit, you’ll be paying for a chunk of your house upfront, so you’ll own that equity outright. Then, you’ll take out a mortgage to cover the rest and pay back the loan with monthly instalments.
Typically, the more you’re able to put down as a deposit in the beginning, the lower your repayments will be, the less you’ll pay over time, and the quicker you’ll be able to pay off your mortgage.
How much deposit do I need to buy a house?
Typically, the bigger the deposit you can put down on a new house the better. This will increase the value of the houses you can afford and will also allow you to access lower mortgage interest rates, which means you’ll typically end up paying less overall.
Some lenders will accept a 5% deposit, and this is becoming more common since the government introduced the mortgage guarantee scheme on 19 April 2021. This is currently set to run until 31 December 2022 and has improved the availability of 95% mortgages because it protects participating lenders if borrowers are unable to make their repayments. The mortgage guarantee scheme is designed to help more people buy properties in the current environment and can be used to buy a main residence that’s worth less than £600,000. It can help you to take out a mortgage that’s worth 91–95% of your chosen property’s value.
It is preferable to save a larger deposit, though, if you’re in the position to do so. If you’re able to save a 15% deposit, you’ll be able to find some great deals. And, if you manage to put down a 25% deposit on a property, you’ll have access to even lower rates of interest, which will make your mortgage cheaper overall. So, when you’re looking to buy a property, consider whether you could save for longer for the best results.
What is the minimum deposit I need for a mortgage in the UK?
Most lenders will require you to pay a deposit of at least 5% of a property’s value before they will offer you a mortgage. However, it is in your best interests to save more if you’re able to do so.
There is a very small chance that a lender will offer you a 100% mortgage, which means you don’t need a deposit, but this is incredibly rare and very risky for both borrowers and lenders.
Can you get a mortgage with no deposit?
The short answer is yes, you can technically get a no deposit mortgage. However, this will mean that you require a 100% LTV mortgage, which are very rare and carry a high level of risk.
The biggest reason 100% mortgages are so risky for borrowers is that house prices could fall, leaving you in negative equity. This means you’ll owe the mortgage lender more money than the property you’ve bought is worth. This can make it incredibly difficult for you to move or remortgage.
Additionally, the interest levels of 100% mortgages are incredibly high, and the repayments tend to be very expensive. It’s much better to take out a mortgage with a deposit of at least 5% if possible — even if it means you’ll have to wait longer to get on the property ladder. There are also Help to Buy schemes that could help you to reach your savings goal much more quickly.
What is the average deposit for a house in the UK?
In 2020, the average first-time buyer deposit in the UK was £57,278, according to research by Halifax [PDF]. This was a 23% — or £10,829 — increase on the previous year’s average, which was £46,449.
If you’re planning to buy a house in London, the average first-time buyer deposit was much higher in 2020. This was £130,357, which is an 18% — or £20,211 — increase on 2019’s average. These numbers were certainly influenced by the coronavirus pandemic, which saw people saving and racing to buy homes as the government introduced measures such as the Stamp Duty holiday to help more people onto the housing ladder. But, overall, house deposits have been rising relatively consistently over the last few years.
What is LTV?
Because very few people can afford to buy a property outright, the majority of homebuyers will have to take out a mortgage to cover the cost. And, the loan to value ratio allows lenders to weigh up the value of a property and the mortgage you would require to buy it. So, for example, if you’re looking to buy a house worth £250,000 and have saved a deposit of £50,000, you’ll have to take out a mortgage of £200,000 to afford it. This will work out as an 80% loan to value ratio with your deposit covering the remaining 20%. Loan to value ratios of 80% and under are typically considered to be low, while those over 90% are usually considered to be high.
If you require a high loan to value ratio, lenders may feel that offering you a loan could be a risk. This is why you will often find that the interest rates are higher on a mortgage if you have a deposit that’s less than 20% of the value of a property you’re hoping to buy. So, if you’re able to wait and save for longer, it could work out more affordable in the long run.
Can I get a loan for a house deposit?
Lenders will typically frown upon you taking out a personal loan in order to cover your house deposit, which means this could prevent you from getting a mortgage. So, we would strongly advise you not to go down this route. When you apply for a mortgage, lenders will ask where the money for your deposit came from, and usually stipulate that this needs to have come from a non-repayable source, such as your savings.
It’s likely to significantly affect a lender’s decision about whether they want to offer you a mortgage if they find out that you’ve taken out a loan to pay your deposit because, in this situation, you will have effectively taken out a 100% mortgage and some of that borrowing will be unsecured.
How can you save for a housing deposit?
With house prices — and, therefore, mortgage deposits — at an all-time high, saving to buy your first home can seem almost impossible. Plus, you also have to think about all of the extra mortgage charges and fees you’ll need to cover, such as legal and insurance costs.
But, there are some tricks you can use to save more money as quickly as possible, so here are some tactics you should keep in mind and use.
Reduce your outgoings where possible
It might seem obvious but, the less money you spend, the more you can save. So, when you decide to start putting money away for a house deposit, you should begin by identifying where you could slash your outgoings. For example, could you move back in with your parents for a while to save on rent and bills? Alternatively, if you live on your own or with a partner and don’t want that to change, consider moving into a cheaper property, or even a house share.
You should also think about how much transport is currently costing you and see if there are any cheaper alternatives you could take advantage of. If you have a car that’s costing you a lot to run and you rarely travel long distances, consider whether getting rid of it and opting to use public transport instead could save you some cash. And, if you already spend a lot on public transport, look for cheaper alternatives — would it be possible for you to cycle or walk to work? Could you car-share with a colleague?
It’s also well worth looking at your day-to-day spending and cutting costs where possible. Could you reduce how many nights you eat out at restaurants, put yourself on an online shopping ban, or spend less on your weekly food shop? Every little really does help.
Take advantage of government schemes
The UK government is very aware of how difficult it has become to get on the property ladder, so they’ve introduced a range of Help to Buy schemes with the goal of making homeownership more affordable.
Here are the main schemes you may be able to take advantage of to boost your mortgage deposit and purchase a property.
Help to Buy Equity Loan
Launched on 1 April 2021, the government’s latest Help to Buy Equity Loan scheme is designed to help first-time buyers purchase properties with a 5% deposit. It’s set to run until March 2023 and, as part of the scheme, the government will lend new homebuyers up to 20% of the cost of a new-build home. This increases to 40% if you’re buying in London.
These loans are interest-free for the first five years, but you’ll pay a monthly management fee of £1 from year six, along with a monthly interest fee of 1.75%. This will rise each April in line with the Consumer Price Index, plus 2%. You will be required to repay the equity loan in full, along with any related interest and management fees at the end of the equity loan term, when you pay off your repayment mortgage, or when you sell your home. And, the amount you’ll pay back will be calculated as a percentage of the mortgage value at the time you choose to repay.
Mortgage guarantee scheme
Launched on 19 April 2021, the government’s mortgage guarantee scheme aims to increase the availability of 5% deposit mortgages to assist more people in buying a home. It’s currently set to run until 31 December 2022 and protects participating lenders if borrowers are unable to make their repayments. This means companies will feel more comfortable with offering 95% mortgages.
Using the mortgage guarantee scheme could be a great option if you know you’re able to make monthly mortgage repayments but can’t save a substantial deposit right now — for instance, because you’re paying to rent somewhere. The scheme is available to both first-time and existing homeowners and can be used on homes with a value of up to £600,000.
First Homes scheme
First Homes is a recent scheme that is designed to help local first-time buyers and key workers buy their first houses. It allows people to buy homes at a discount of at least 30% in comparison to the market price.
To qualify, you must have a household income of less than £80,000 or £90,000 in London. And there’s a post-discount price cap on the first sale of First Homes properties — this is £250,000 across most of England and £420,000 in London. It will be up to your local authority to decide whether you can use this particular scheme depending on factors such as your local connections and whether you’re a key worker.
If you’re unable to take out a mortgage to cover the entire value of a property, the Shared Ownership scheme could provide you with the support you need. It will allow you to buy a 10–75% share of a property and pay rent on the rest. Then, over time, you can buy bigger shares if you can afford to do so.
The Shared Ownership scheme will typically be available to you if your household income is less than £80,000 per year or £90,000 in London. And you could be eligible whether you’re a first-time buyer or someone who has previously owned a home but can’t afford to buy a new one now.
With the Lifetime ISA (LISA), you can save up to £4,000 into a savings account each year and the government will top this up with a 25% bonus. This can be used as a house deposit or you can use it to support yourself in retirement.
To be eligible for a LISA, you need to be an adult aged 18–39. And, in order to use the funds to buy a home, you’ll need to choose a property with a value of less than £450,000. Your account will also need to be open for at least 12 months before you make your purchase.
Help to Buy ISA
Help to Buy ISAs were once an incredibly popular option among people looking to buy their first homes, but they’re no longer available to open. However, if you already have one, you can continue to save up to £200 per month until November 2029 or until you’ve reached the account’s limit of £12,000. You’ll then have until 1 December 2030 to buy a property and claim your 25% bonus from the government.
It’s proven to be a very fruitful option for first-time buyers over the last few years and these ISAs can be used to buy a home worth up to £250,000, or up to £450,000 in London.
If you’re planning to use one of these schemes to buy a property, our team of expert mortgage brokers can provide you with Help to Buy and new-build mortgage advice that will help you through the process. Applying for a mortgage using a Help to Buy scheme can involve taking some extra steps, but we can help to ensure everything goes smoothly.
Gifted deposits: Can parents or relatives help to cover your mortgage deposit?
Yes, you can receive financial help from parents and close family members when you’re trying to get a house deposit together. However, it isn’t as simple as them transferring the funds into your bank account so you can declare the money yours — there is a process that needs to be followed.
When someone contributes to your housing deposit or covers it completely, this is called a gifted deposit. And the crucial thing is that it must be a gift, with no agreement for you to pay the money back. If your parents or close family members are looking for a way to help you get on the property ladder, this is usually the simplest way.
Some lenders will only allow you to accept a gifted deposit from certain people. Immediate family members such as your parents, siblings, and grandparents will usually be accepted, but more distant relatives like aunties and uncles sometimes aren’t.
Additionally, while lenders typically have their own rules and requirements when it comes to mortgages, there are some common clauses and exclusions you should be aware of before you start the process of buying a house with a gifted deposit. For example, the company you choose to take your mortgage out with may require the person who’s gifting you some or all of your deposit to make a written declaration that they don’t expect you to pay it back. If you do have to pay it back, they might categorise this as they would a traditional loan which, as we mentioned earlier, could deter them from giving you a mortgage. Alternatively, they might add the deposit repayments to your monthly outgoings to determine whether they think you’ll still be able to make your mortgage repayments, which could lead to your application being rejected.
Your benefactor may also be asked if they expect to have equity in your property, or whether they expect to live there after purchase. They may also be required to sign a declaration that states they relinquish all legal interest in the property.
Additionally, conveyancers will conduct their own checks to determine where a gifted deposit has come from. As a result, they’ll typically require the full name and ID of any benefactor, as well as evidence of the origins of the money. If it’s coming from a savings account, they’ll usually require a bank statement and may also ask for details about how the money has been accumulated.
What is a gifted deposit letter or declaration?
In order to confirm that any money you’ve been given to help you get onto the property ladder is a gift, anyone who has contributed to your deposit will typically be required to sign a Gifted Deposit Letter. This letter will need to include details such as:
- The name of the person receiving the gift
- The sum of the loan
- Confirmation that the money is a gift with no expectation of repayment
- Confirmation that the gift is motivated by love rather than commercial interests
- An understanding that this doesn’t provide the gifter with any stake in the property
- Confirmation that they are financially solvent
- The signature of the gift giver and a witness
Once your gifted deposit letter is written and signed, it should be sent to the conveyancing solicitor and will be considered a legal statement. Your lender may also require a specific form to be filled out to confirm the details of the gift.
House deposits and remortgages
If you decide to remortgage your home, you can use your existing equity as a deposit. Your equity is the difference between the market value of your home and how much you still need to pay off your mortgage. So, for instance, if your home is worth £250,000 and you still have £150,000 to pay off it, your equity is £100,000.
If you have some additional savings and want to get the best deal possible when you remortgage, adding this money to your equity can increase your deposit and give you access to even better mortgage terms.
House deposits for second homes
If you already have a home and are looking to buy a second property for you and your family, you’ll usually need a deposit of at least 25%. It’s also likely you’ll pay a higher interest rate on a second home’s mortgage and will be required to prove that you can afford the repayments on both of your mortgages.
Most lenders see second home mortgages as particularly risky, so they do tend to work out as more expensive. This means it can be wise to pay as much as possible off the value of your second property with your deposit to make your repayments more affordable.
House deposits for buy-to-let mortgages
If you’re looking to purchase a property with the sole intention of renting it out, you’ll need to take out a buy-to-let mortgage. The minimum deposit will typically be at least 25% of your property’s value and, as with other types of mortgages, a larger deposit will give you access to lower interest rates.
It can be difficult to be accepted for a buy-to-let mortgage, so you need to ensure you have strong rent prospects and a great credit score. It’s also worth noting that most buy-to-let mortgages are interest-only, so you’ll only pay off the interest each month rather than reducing your debt. Then, when you come to sell your rental property, you’ll need to repay the capital in full.
Mortgage deposit calculator
If you’re not yet sure how much you’ll need to save to purchase your dream home, we have a mortgage calculator that can help to give you an idea.
You’ll simply need to provide us with some simple details like your annual income and whether you’re buying with anyone else. We’ll then be able to give you an insight into how much you could be eligible to borrow, so you can work out how much of your ideal property’s value you’ll need to save up as a deposit.
If you’re in the process of saving for a house, it’s normal to feel overwhelmed. Buying a property is likely to be one of the biggest investments you ever make, so preparing for it can take a lot of time and planning. But, if you’re able to set realistic goals and stay focused, saving up a house deposit is doable.
And, if you are looking to make a purchase soon, we’re here to help. Our mortgage brokers are experts in helping prospective homebuyers to navigate the system and get the best deal to suit their needs. So, if you would like us to help you through your property buying journey, start a live chat with us or call our team on 033 33 44 33 72 and we’ll be more than happy to assist you.