How do mortgage deposits work?

At Strive Mortgages, we’re often asked by home buyers how much deposit they’ll need to make a house purchase and ways they save for one.

For most people buying a home requires considerable sums of money saving enough for a deposit can be challenging.

In this guide we will explore some of the deposit types that are acceptable and how much deposit you may need.

How much deposit do I need for a mortgage?

To calculate how much you might need to save for your mortgage deposit, you should consider the typical property prices in the area where you want to buy a home, as well as the monthly repayment costs of the mortgage you are considering.

Typically, lenders require a deposit of at least 5% to 20% of the property’s value, depending on the lender’s policies and your creditworthiness.

The larger the deposit, the lower your monthly mortgage repayments will be. Therefore, saving for a larger deposit can help you reduce the total amount of interest you pay over the life of the mortgage.

Typical property prices in your area

In the UK, there are several ways to find property prices in your area:

Zoopla and Rightmove: Zoopla and Rightmove are two popular property portals that allow you to search for properties in your area and view their prices. These websites also provide tools to filter your search by property type, price range, and other criteria.

For more concrete information, you can check how much homes in the area have sold for using the Land Registry’s price paid tool.

How much you can afford in repayments?

When buying a property, it’s important to not only save for the deposit, but also to make sure that you can afford the monthly mortgage repayments.

To determine whether you can afford the mortgage repayments, you should consider your income, expenses, and debt-to-income ratio (DTI).

Your DTI is the percentage of your monthly income that goes towards paying your debts, including your mortgage, credit cards, car loans, and other debts.

As a general rule of thumb, your mortgage repayments should not exceed 28% to 36% of your gross monthly income.

If the monthly repayments for a low-deposit mortgage are too high for you, there are a few options to consider

• Save for a bigger deposit: By saving for a larger deposit, you may be able to access better mortgage deals with lower interest rates and monthly repayments. Saving for a larger deposit can take time, but it may be worth it in the long run
• Consider alternative schemes: There are government-backed schemes that can help first-time buyers or those with a low deposit to access the property ladder. For example, the Help to Buy scheme, which provides an equity loan to help you buy a new build property with a 5% deposit.
• Guarantor mortgages or  Joint borrower sole proprietor mortgages: With a guarantor or JBSP mortgage, a family member or friend agrees to guarantee the mortgage repayments if you’re unable to make them. This can help you access a mortgage with a lower deposit and more favourable terms.
• Delay buying a property: If you’re struggling to afford the monthly repayments, it may be worth considering delaying buying a property until you’ve saved a larger deposit or improved your financial situation.

Reasons to save a bigger mortgage deposit

Saving for a larger mortgage deposit has several advantages:

• Lower interest rates: Lenders typically offer lower interest rates to borrowers who have larger deposits. A larger deposit may also mean that you are considered a lower risk borrower, which could result in a better interest rate.
• Lower monthly payments: A larger deposit means you’ll have to borrow less, resulting in lower monthly mortgage payments. This can help you to budget better and potentially reduce financial stress.
• Greater affordability: If you have a larger deposit, you may be able to afford a more expensive property. This could give you access to better locations or larger properties that would otherwise be out of your budget. Lenders also be willing to let you borrow more money when you have a larger deposit.
• Better chance of approval: A larger deposit may improve your chances of being approved for a mortgage, as it demonstrates to lenders that you are a responsible borrower who has a greater ability to save.
• Reduced risk of negative equity: If you have a larger deposit, you are less likely to fall into negative equity if the value of your property falls. This is because you will have a greater stake in your property and will owe less to your lender.

Overall, saving for a larger mortgage deposit can have significant financial benefits in the long run, so it is worth considering if it is feasible for you.

How much deposit do I need on exchange of contracts?

In the UK, the amount of deposit required to exchange contracts on a property purchase is typically 5-10% of the purchase price.

This deposit is paid to the seller’s solicitor on exchange of contracts and is usually held in a special account until completion of the sale.

Loan to Value

Loan to value (LTV) is the ratio between the amount of mortgage borrowed and the value of the property being purchased.

For example, if you are purchasing a property valued at £300,000 and you have a deposit of £60,000, your loan amount would be £240,000. In this case, the loan to value ratio would be 80% (£240,000 ÷ £300,000 x 100).

LTV is important to lenders because it helps them determine the risk of lending money to borrowers.

Generally, the lower the LTV, the lower the risk to the lender, as the borrower has a greater stake in the asset being purchased.

Lenders typically prefer to lend to borrowers with a lower LTV, as they are less likely to default on the loan.

LTV also affects the interest rate offered by lenders. Borrowers with a lower LTV may be offered lower interest rates as they are considered less risky to the lender. Conversely

Lenders typically have maximum LTV limits for mortgage lending. The specific limit can vary depending on the lender and the type of mortgage product, but is generally around 90% for residential mortgages and 75% for buy-to-let mortgages.

What deposit sources are an acceptable?

The sources of deposit that are acceptable for a mortgage can vary depending on the lender and the type of mortgage you are applying for. However, some common sources of deposit that are generally accepted by most lenders include:

• Personal savings: This is the most common source of deposit and involves using your own savings to contribute towards the deposit for the property.
• Gifted deposit: A gifted deposit is when a family member or friend provides money towards the deposit as a gift, rather than a loan. The money is usually provided in the form of a lump sum or transferred directly to the solicitor handling the property purchase.
• Equity from an existing property: If you already own a property, you may be able to release equity from it to use as a deposit for your next property purchase. This involves taking out a mortgage on your existing property or selling it and using the proceeds to contribute towards the deposit.
• Inheritance: If you have received an inheritance, this can be used towards the deposit for a property purchase.

Your options if you’re struggling to save

• First Homes government scheme: offering discounts of up to 30% for first-time buyers.
• Shared ownership: Shared ownership is a government-backed scheme that allows you to purchase a share of a property (usually between 25% and 75%) and pay rent on the remaining share. This can be an affordable way to get on the property ladder with a smaller deposit.
• Guarantor mortgages: Or If you have a family member who is willing to act as a guarantor, some lenders offer guarantor mortgages that can help you to borrow a larger amount with a smaller deposit. The guarantor would need to agree to cover any missed mortgage payments if you are unable to pay.
• Family deposit mortgages: Some lenders offer family deposit mortgages that allow a family member to provide a deposit on your behalf. The family member would provide the deposit as security against the mortgage.
• Savings from a Help to Buy ISA or Lifetime ISA: Help to Buy ISAs and Lifetime ISAs are savings accounts that are designed to help people save for a deposit for their first home. The government will add a bonus to your savings when you come to purchase your property.
• Personal loan deposit: Some lenders may offer this option under specific circumstances. Santander is one lender that has this option.

Can I use a gift as a deposit?

Yes, it is possible to use a gift deposit when purchasing a property in the UK.

A gift deposit is when someone gives you money towards the deposit for your property purchase, usually a family member or close friend.

This can be a great help for first time buyers  who may struggle to save up enough money for a deposit on their own.

However, when using a gift deposit, you will need to provide evidence to the mortgage lender that the money is a gift and not a loan that will need to be repaid.

This evidence may include a signed letter from the gift giver, showing that they do not expect the money to be repaid, and evidence of the transfer of funds from their account to yours.

How much deposit do I need for a new build?

Most lenders may require a larger deposit for new build properties compared to standard properties.

This is because new build properties are often considered riskier investments due to potential issues with construction or defects, and the lender will want to reduce their risk exposure.

As a result, you should expect to put down at least 15% of the property’s value (85% loan-to-value or LTV) if you’re buying a new build. Some lenders may even require as much as 20% or 25%. This is significantly more than the 5%-10% (90%-95% LTV) offered on standard properties.

How much deposit do I need for a buy-to-let mortgage?

Generally, most lenders require a minimum deposit of 25% for a buy-to-let. This means that if you are purchasing a property for £200,000, you will typically need to provide a deposit of at least £50,000.

Some buy to let lenders may require a larger deposit than 25%, this is because they conduct additional stress tests on the projected rental income of the property.

How much deposit do I need if I have bad credit?

If you have adverse credit the deposit required for a mortgage may be higher than the typical amount.

This is because a poor credit score can indicate a higher risk of defaulting on the loan, and lenders may require a larger deposit to offset that risk.

The amount of deposit required will depend on your individual circumstances and the lender’s specific criteria. Some lenders may require a minimum deposit of 15% or 20%, while others may require a deposit of 25% or more.

For more information on mortgage deposits, please contact a member of the Strive team, by emailing info@strivemortgages.co.uk or call us on 01273 002697.