When it comes to mortgage deposits, generally the more money you can save, the better. Having a bigger deposit can open the door to a wider choice of properties and lenders, plus better rates on a range of mortgage deals.
So, how much do you need? Usually, you’ll have to fork out at least 5% of the value of the property upfront. On an average house worth just over £250,000, that means saving a minimum of £12,500 as a deposit. In reality, though, things aren’t always so simple. This guide will explain everything you need to know.
How much deposit do I need for a mortgage?
These days, most lenders ask for a minimum deposit of 5% of the value of your property. However, many homebuyers will aim closer to 10% or 20% – or sometimes even more.
In practice, the size of deposit you need will depend on:
- How much interest you’re happy to pay. Put simply: the bigger your deposit, the less you’ll need to borrow. And the less you borrow, the lower the interest. Many homebuyers want better rates, so they save as big a deposit as possible to achieve this. But others will be happy to pay a bit more in interest so they can put down a smaller deposit. Both are totally legit options, depending on your circumstances.
This is where loan to value (LTV) comes in. If you pay a 20% deposit, you’re borrowing 80% of the value of the property, meaning you have an 80% LTV. If you pay a 5% deposit, you’re getting a 95% LTV mortgage. A 30% deposit? 70% LTV. A lower LTV usually means lower interest payments, and that means paying less for your property in the long run.
- How much you earn. Generally speaking, the less you earn, the less you can borrow. And if you can’t borrow as much as you’d like, you’ll either need a bigger deposit to bridge the gap, or you’ll need to find a cheaper property. Lenders tend to cap the amount you can borrow at 4.5 times your annual income (although this isn’t always the case).
Numbers: Say you earn £30,000 a year. The cap means you’ll probably only be able to borrow £135,000. So if your dream house is £200,000, you’d need a £65,000 deposit.
- Whether you’re buying a property to live in or to let. Buy to let and residential mortgages need different deposits. Buy to let mortgages can sometimes ask for as much as 40% as a down payment.
- Where in the UK you’re looking to buy. The size of deposit you’ll need differs by region. In some places, you’ll need to save much less, while in others, you’ll need more. In London, for example, first-time buyers now need an average deposit of £132,685.
What’s the average mortgage deposit?
As of March 2021, the average deposit for a mortgage across the whole of the UK was nearly £59,000. That amounts to a down payment of 23% of the value of the average property. This is up by £12,000 on the average deposit from 2020.
But the numbers aren’t the same across the country. Average deposits change pretty radically according to the region you look at. Here are some typical numbers for a three bedroom home for a first time buyer:
- In London, the average deposit was £132,685. That’s 27% of the average house price of £488,381.
- In Wales, the average was £33,919, or 20% of £169,111.
- In Scotland, you’re looking at £36,085 for an average deposit. That’s 23% of the average £155,193 property.
- West Midlands: a £42,503 deposit, or 21% of £205,995.
So if you’re not limited by geography, you definitely can buy a property with a much smaller deposit – but first-time buyers in the UK, in general, are paying more upfront right now than they ever have done before.
The 5% deposit mortgage scheme
In April 2021, the UK Government launched a “95% mortgage” scheme to get mortgage lenders to offer more mortgages with a lower deposit.
Their aim is to get more people on the property ladder by making more mortgage deals available with a 5% to 9% deposit. So far, banks including NatWest, Santander, and Lloyds have all signed up. You can find out more about 5% deposit mortgages here.
To put the numbers in perspective (and the differences between areas), if you manage to get a 5% deposit mortgage for a property in London, you could be looking at a deposit of around £24,419. In Wales, you’re looking at £8,455, and in the West Midlands, £10,299.
Are there such things as no deposit mortgages?
Ah, the fabled no deposit mortgages. These do indeed exist – but they’re not that common at all. They’re also known as 100% mortgages, or 0% deposit mortgages. These are mortgages that require no deposit at all. In other words, you borrow the whole value of the property as your mortgage.
Most of the no deposit mortgages on the market tend to be guarantor mortgages.
With a guarantor mortgage, someone – usually a family member – offers their property or savings as security on your mortgage. This often means they’ll need to put a portion of the value of the property in a special savings account, which lenders can access if you don’t cover payments.
Be aware that interest rates are usually high on no deposit mortgages. And if the property value drops, without you having made any payments towards the property through a deposit, you might find yourself with negative equity – which is when your property is worth less than the amount you owe on your mortgage. This can make it tough to remortgage, and if you sell with negative equity on a guarantor mortgage, your guarantor will have to make up the difference for the lender.
How much do I need for a buy to let mortgage deposit?
For a buy to let mortgage, many lenders want to see a deposit of at least 20% to 25%. And in some cases, it’s as high as 40%. However, like other types of mortgage, the bigger the deposit, the better the interest rate.
Lenders tend to ask for a larger deposit for a buy to let mortgages for two reasons:
- They’re not covered by the same regulations. Buy to let mortgages are technically investment loans, rather than consumer loans. That means lenders have much more freedom to set the conditions of the deal.
- Buy to let mortgages are a bit riskier. Essentially, you’ll be relying on having tenants. This means that more variables outside your control could affect your ability to pay your mortgage, like your tenants failing to pay rent, or the property sitting empty.
At Habito, we’ll help you make sense of what mortgage is the best for your unique circumstances. We’re both a lender and a whole-of-market broker – so you’ll also get access to 20,000 deals from over 90 banks and lenders, as well as exclusive mortgages lent by Habito. Try us out here.