If you're dreaming of owning your own home, the first step is saving for a deposit. In this article, we'll explore the importance of a deposit in the home-buying process, how much you need, and tips for saving more. We'll also discuss if it's possible to get a mortgage without a deposit.
What Is a House Deposit?
A deposit is the amount of money a first-time buyer needs to put down from their own savings before getting a mortgage. This is your initial equity in the property, most lenders require a minimum deposit of 5% of the property price. For example, if a house costs £200,000, you would need a deposit of £10,000.
How to Save for a Deposit?
Saving for a deposit can be challenging, especially when you're young. However, if you live with your parents and earn an average salary, saving can be more manageable. If you're renting, you might need to make some sacrifices to save money, but it’s possible.
Aim to save about 20% of your disposable income each month. Consider savings accounts with good interest rates or a Lifetime ISA (LISA), which offers a 25% government bonus on savings up to £4,000 per year.
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Understanding Loan-to-Value (LTV)
Loan-to-value (LTV) is the ratio of your mortgage to the property's value. A higher LTV means higher risk for the lender, which can make it harder to get favourable mortgage deals. Saving a larger deposit improves your LTV making you a more attractive borrower, however first-time buyers often have a higher LTV.
Can I Get a Mortgage with No Deposit?
Yes, but 100% mortgages are rare and only offered by a few lenders. To qualify, you need a good credit history and a guarantor, who offers their property as security for part of the mortgage. If you default, the guarantor is responsible for the shortfall.
Benefits of a Larger Deposit
Lower Repayments & Better Deals
A larger deposit reduces the amount you need to borrow, leading to lower monthly repayments. You'll also have access to better mortgage deals, as lenders view you as a lower risk.
Higher Acceptance Chances
Lenders are more likely to approve your mortgage application if you have a larger deposit, as it shows you can manage monthly repayments more easily.
Reduced Risk
A larger deposit reduces the risk for lenders. If property values fall, you’re less likely to owe more than the house is worth, protecting you from negative equity.
Boosting Your Deposit: Options
Help-to-Buy
The Help to Buy Scheme assists first-time buyers in purchasing new-build properties with a small or minimum deposit. Buyers can get an equity loan of up to 20% of the property's value (40% in London), interest-free for the first five years. This scheme has specific eligibility criteria and a regional maximum property price.
Shared Ownership
Shared Ownership allows you to buy a share of a house and pay rent on the remaining share. You can purchase larger shares over time. Key points include:
- Income limits: £80,000 outside London, £90,000 within London
- Purchase shares between 25% and 75% of the property's value
- Available to first-time buyers, existing shared owners, or previous homeowners who can't afford a new home
- Applies to new builds and existing properties, which are always leasehold
Buying with Friends
As property prices rise, buying with friends has become popular, this approach allows you to jointly own a property and share the mortgage. A cohabitation agreement or deed of trust is essential to outline property division and what happens if someone wants to move out or sell their share. Note that all parties are jointly and severally liable for the mortgage debt.
Family Assistance
Many homebuyers receive financial help from family. Options include:
- A financial gift (gifted deposit)
- A loan
- Linking savings accounts
- Acting as a guarantor
Lifetime ISA (LISA)
A Lifetime ISA (LISA) helps you save for your first home, the government adds a 25% annual bonus on savings up to £4,000 per year. You can contribute to a LISA until age 50, after which it continues to accrue interest but without the bonus. LISAs are available to those aged 18-39.
Buy-to-Let Deposits
For buy-to-let mortgages, the required deposit is significantly higher, usually between 20-40% of the property value.
Frequently Asked Questions
When Do I Pay My Deposit?
You typically pay your deposit at the exchange of contracts, securing your commitment to proceed with the purchase.
Who Do I Pay My Deposit To?
You transfer the funds to your conveyancing solicitor, who then pays the seller’s solicitor when contracts are exchanged.
Can I Borrow Money to Pay for My Deposit?
Using a loan to fund a deposit is possible, but mortgage brokers will scrutinize your ability to repay both the loan and the mortgage. Loans from family members are generally more favourable than those from loan companies.
Does Bad Credit Affect the Amount of Deposit I Need?
Yes, bad credit can affect your mortgage application. Lenders will consider factors like your debt-to-income ratio, the nature of the bad credit, and the amount of debt. A stable recent history of income and employment can help your case.
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