Deposit. The first thing you need to consider before getting on the property ladder. The deposit is an essential part of the application process, and no lender will consider you without one.
In this article, we will look at the role of the deposit, how to maximise your deposit and schemes that can help those who might struggle to save a deposit. We’ll also share our top tips to help you save a deposit. So how much deposit do you need for a mortgage?
Not many people have enough money lying around to buy their home with cash. This means they will need to apply to a bank for the funding. When lending money, banks have to consider the risk that the money will not be paid back.
If a borrower can’t keep up with their payments, the bank must repossess and sell their property. Since banks often need to sell homes quickly, they will let the property go for below the market value. This means they could fail to get back their initial investment. This is where deposits come in.
A deposit reduces the amount of money that an applicant needs to borrow, but it also ensures they shoulder some of the risk. If you could just walk away from your home if you are unable to keep up with the repayments and start again, the housing market would be completely destabilised. But when you’ve paid a deposit, you risk losing your investment and any equity you have earned in repayments. So by paying a deposit, you’re sharing the risk with the lender.
Any lender will say that the bigger the deposit, the better. The more deposit you can provide, the less you need to borrow. This means that your monthly repayments will be lower and you could save a lot of money in interest over the lifetime of the loan. You could also reduce the repayment terms to help you live mortgage free even faster.
A good deposit would be around 25% to 40% of the value of the property. This will give you access to a wide range of lending products and will ensure you can secure the best possible rates.
No, the days of zero deposit mortgages are now behind us. After the financial crash of 2008, the financial sector has undergone some significant changes. Eliminating 100% LTV mortgages is one of the biggest shakeups.
Lenders want to see that you are sharing some of the risk, so a minimum deposit of 5% will be required to purchase a property. By making the most of government lending schemes and savings incentives, even a modest deposit could allow you to secure a good deal on your mortgage.
Many lenders stopped their 5% mortgages during 2020 due to the coronavirus pandemic. In 2021, the government then announced a government-backed scheme to encourage lenders to start offering this product again.
This 5% government-backed mortgage offers protection to the lender, but not the borrower. If you are unable to keep up with your repayments, the government will ensure the lender doesn’t lose out. But there is no additional protection for borrowers.
The government-backed scheme is not a guarantee that you will be accepted. You will still need to pass the affordability checks. However, if you are determined to get on the property ladder and only have a small deposit, there should now be more lenders willing to look at your application.
Every lender will have its own criteria, so it’s difficult to say the exact score that is required to be accepted for a mortgage. Lenders will look at different credit scoring agencies and have their own rules for what is acceptable, what is cause for concern, and what will result in a rejected application.
In general, all lenders want to see a steady and reliable source of income. They also want to see a history of good financial behaviour. Lenders might consider an application even if you have adverse credit history such as missed payments, defaults and CCJs. Bear in mind that this type of lending is higher risk, so you can expect to be charged higher rates and be subject to higher fees.
Another factor that lenders consider is whether or not you are on the electoral roll. It might seem like a small factor to consider, but being on the electoral roll at your current address makes it easier for lenders to confirm your identity. This simple step could speed up your application and give your lender confidence.
The amount of deposit you can offer has a significant impact on the mortgage you can acquire. In general, the bigger the deposit, the lower the rates and fees. This can have a significant impact on the lifetime cost of your home loan.
Another thing to consider is that you will have a larger pool of potential lenders to choose from when you have a bigger deposit. When you are working with a deposit between 5% and 9% of the property value, there will be fewer lending products available. By boosting your deposit to 10%, you’ll open more doors. It’s easier to shop around for the best deal when there are more deals available to you.
If you have a small deposit and want to access more lending products, you will need to find a way to increase the deposit amount. The simplest way to do this is to set your sights on a cheaper property. £10,000 would be a 5% deposit for a £200,000 house, but it would be a 10% deposit for a £100,000 apartment. Consider if you can downside and compromise on the property to access better lending products.
You could also boost your deposit amount using a government-backed scheme. The most popular lending schemes are outlined below:
The LISA is a savings account that can boost your savings by £1,000 every year. For every £100 that you put into the account, the government tops this up by £25 at the end of the year, up to £1,000. If you save £4,000 over the year, the government will add £1,000.
The government’s Help to Buy equity loan allows you to boost a 5% deposit with a 20% loan. This allows you to shop around for the best possible deal with a 25% deposit. You then pay back the equity loan alongside your mortgage.
If you have a smaller deposit, another option would be to choose a shared ownership scheme. This scheme allows you to purchase a percentage of a property and pay rent on the remaining percentage from a property developer or housing association. Over time, you can apply to increase your ownership until you have purchased it in full.
If you don’t have rich relatives willing to give you your deposit as a gift, you’re going to need to get thrifty with your income. Saving money is never easy, but if you dream of getting on the property ladder, it is an essential step.
You will need to be strict every month to keep your spending under control. You will also need to be disciplined to make sure you don’t dip into your savings. Follow these steps to maximise your savings every month.
It sounds obvious, but many people fall at this hurdle. Saving requires discipline, but you can’t be disciplined if you don’t know what to expect in the month ahead.
Look at your income and outgoings for the past few months and identify how much you need for essentials like bills and food shopping. Add on travel and other essential expenses. Make sure you set aside something for treats.
Now you know what is left and what you can realistically afford to save. This should be your minimum, and any additional savings can easily be added if you find you can cut more corners throughout the month.
It’s accepted that the best way to be disciplined with your savings is to set aside money at the start of the month. Once you know how much you can afford to save, take this out of your bank account as soon as your salary lands. This will remove the temptation to overspend throughout the month.
If you are very disciplined, you might find you have money left at the end of the month, too. There’s no harm in topping up your savings further if you have been very good with money throughout the month. Just make sure you aren’t stretching yourself too thin.
Many of us are guilty of paying for subscriptions we don’t need because we forget to cancel them. Keep a close eye on your bank accounts and try setting up text alerts so you know what leaves your account and when. This is an excellent way to spot errors in your banking.
A forgotten gym membership could cost £40 a month, or £480 per year. Add this up over a few forgotten payments and you could be missing out on thousands in savings. Downgrading certain subscriptions, such as dropping the Movie option on your TV package is another way to save money.
We’re all guilty of folding under peer pressure and agreeing to do things with friends, even when we can’t afford it. When you’re saving for a deposit, every decision counts, so don’t be afraid to say no to plans if it would blow your budget for the month.
Plenty of people would destroy their savings goals and spend £1,000 on a hen party just to avoid saying no. But if you aren’t going to enjoy the weekend anyway, don’t be afraid to politely decline. Once you’re in your home you can make up for lost time with more confidence.
Before you start saving for a deposit, build an emergency fund. This should include around 2-3 months of expenses to help you manage any surprises. This is beneficial as it will prevent you from dipping into your house savings if you’re ever running short.
By using an emergency fund, you can also put your savings in an account that you are unable to withdraw from. This is common with savings accounts that offer a higher rate of interest.
If you’re hoping to get on the property ladder, we can connect you with mortgage brokers that can help find you the best possible deal. Working with a broker can help you to maximise a smaller deposit and secure the best possible deal for your situation.