Guide to mortgage deposits

DEPOSIT GUIDE – HOW MUCH DO YOU NEED TO SAVE?

In the context of property, a deposit is an amount of money that you pay, which is a percentage of the full cost of the property you want to buy, so that a bank or money lender will give you a mortgage to pay for the rest of the property.

The more money you save for a deposit, the less you must repay on a mortgage. To buy a property, covering the costs usually looks like this:

DEPOSIT + MORTGAGE = TOTAL PROPERTY PRICE

Below we have outlined what happens when you save a certain percentage of the property price and the options that become available to you.

0% Deposit

Some mortgages do exist where you don’t need any deposit at all. These are usually guarantor mortgages. Since your deposit would be £0, the mortgage you receive will be 100% of the property’s price.

With a guarantor mortgage, you would have a family member, close relative or guardian who legally promises to cover the repayments on the mortgage if you can’t. They might also offer their own home or savings as security on the mortgage, meaning that if you can’t keep up with the repayments, it might be their home or money that covers the costs.

Guarantor mortgages do have risks. Always make sure you and your guarantor understand these risks and the repayments needed before getting one.

5% Deposit

With a 5% deposit, you would need a 95% mortgage to pay the remaining amount of the property.

95% loans have high-interest rates (meaning more money is added to how much you must pay back) and you usually have to be earning a higher than average salary to prove to a bank that you can pay the loan back.

However, a 5% deposit is the minimum requirement for the Help to Buy scheme, which lets you borrow money off the Government to make your deposit bigger, so your mortgage will be much smaller and have better interest rates.

The Help to Buy scheme differs slightly depending on where you are in the UK and is only applicable to new-build homes.

If the property you’re looking at is being sold under Shared Ownership, then a minimum of 5% is needed for the share of the property you’re buying. So, if you were to buy a share of the property at £80,000, you would only need £4000.

10%+ Deposit

The higher your deposit gets, the more mortgages you’re likely to be accepted for, the less you must repay and the less your interest becomes.

For example, if you had a 10% deposit, your initial interest rate (an introductory rate that lasts for around a couple of years) on your mortgage could be around 3% and then go up to 4% for the rest of the time repaying the mortgage.

If your deposit was 15% of the property price, the initial rate could be about 1.5% and go up to 3.8% for the rest of the mortgage repayments.

If you manage to save 20%, you’ll have access to even more mortgages from different lenders, with even lower interest and monthly repayments.

As we said in the beginning: the more money you put down at first, the less you’ll be paying out each month when you buy the house.

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