How much deposit do you need for a mortgage? (Part 1)

How much deposit do I need for a mortgage? What’s the average First Time Buyer deposit?

The average First Time Buyer deposit depends on your savings and other things. I’ve seen a big influx in the last few years of gifted deposit from parents or grandparents.

I would say that an average deposit over the last two years is probably about 10%. But that said, there isn’t really an average. If you’re buying a house at £200,000 and you’ve got a £10,000 deposit that’s 5%. You’ve got what you’ve got.

As far as lenders are concerned, they all insist on a deposit ordinarily, and the smallest until recently has been a 5% deposit. So if you were buying a house at £100,000 that would be £5,000.

As I always explain to First Time Buyers, the bigger the deposit, the less risk to the lender – so the better the deal. If you’re looking at a 95% mortgage, it will have a higher rate than a 90% mortgage. In turn, that would have a higher rate than an 85% mortgage. So the size of your deposit affects the rate you’re going to get.

Let’s confirm we are recording this episode in April 2024 – because of course market trends change, don’t they?

Absolutely, and within the last couple of weeks a lender has come to the market with a minimum deposit of £5,000. So even if you were buying a house at £500,000 you would only have to put a £5000 deposit down – assuming you could afford it on your income.

The interest rate is higher, and the qualification for getting that mortgage is a lot higher – they will only look at people with a high credit score. But lenders are quite innovative in what they’re doing to stimulate the market.

What does LTV mean?

LTV is Loan to Value – and that’s how much you’re borrowing as a percentage of the purchase price.

So if you were looking at buying a house at £100,000 and you were looking at borrowing 95%, the Loan to Value is 95% and you put in a 5% deposit. If you were looking at putting 10% down, the Loan to Value would be 90%.

With a 95% Loan to Value, the lender only has a 5% buffer in the property. If you were getting a 60% Loan to Value, you’ve put 40% in so the risk to the lender is significantly lower. In turn, that will give you a significantly cheaper interest rate.

What does a bigger house deposit mean for my Loan to Value?

A bigger deposit gets you cheaper interest rates, which in turn means cheaper mortgage payments.

That’s always been the case. The highest Loan to Value – 95% – comes at a higher interest rate. Years ago you used to be able to get 100% mortgages, and they were considerably higher because the risk was so great to the lender.

If, in years to come, you ever struggled with payments and they repossessed that house, they would often struggle to sell the property and recoup the mortgage. Therefore they put a load on that rate, making it much higher.

How much should I save for a deposit and how can I do it?

If you’re wanting to buy a house you want the biggest deposit you can possibly get. So going out on a Friday night and Saturday night goes out of the window. Instead of going out for that big expensive meal, you might wait until you’ve got your house and you’ve moved in.

The bigger the deposit, the better, because it’s not just the deposit you need. If you’re buying a £100,000 house we could get a 95% mortgage and you would need £5,000 – but you’re also going to need to pay for other things like legal fees.

And, as anybody will tell you, when you move into that house you’ll want to change a lot in the first six or nine months – whether it’s just paint, or wallpaper, or new carpets. You might need to go bigger and get a new kitchen or new bathroom.

So if you’re planning on buying a house you really want to be saving as much as you possibly can. If the house needs some work on it, you might end up reducing the deposit to keep some money back for redecoration. But at least you’ve got the option once you’ve got that cash in your bank or building society.

Can I get a mortgage with a 0% deposit? What’s the minimum deposit for a house?

Well I’ve now got to say the minimum is £5,000 because of that new deal. Before that it was a 5% deposit.

That said, there are certain schemes where you don’t even need as much as that. I’ve just arranged a client’s mortgage for a Right to Buy, where they’ve been renting a property from the council for many years. With Right to Buy they get quite a large discount from the council that they can use as a deposit.

So they haven’t actually put any of their own money into the deal. Strictly speaking, that was a 100% mortgage, but it was a specific scheme available if you’ve been rented through the council.