How Much Deposit Do I Need For Mortgage?

A Mortgage Deposit: What Is It?

A mortgage deposit is the initial amount you pay towards your new home loan or mortgage.

The amount is paid upfront and calculated as a percentage of your new home’s purchase price.

For example, if your new home’s purchase price is £400,000 and your required mortgage deposit is 10%, you’ll pay a £40,000 mortgage deposit.

Why do I need to pay a mortgage deposit?

Every UK home buyer must put down at least a minimum mortgage deposit amount to prove their ability and willingness to pay off their mortgage.

The higher the deposit you’re willing and able to pay, the more mortgage lenders you can approach for a home loan. This will allow you to get a better mortgage deal.

A bigger deposit also ensures you pay a lower interest rate and helps reduce your monthly home loan payments.

How much deposit do you need to pay to get the best mortgage interest rates?

Many mortgage providers suggest you pay a 20% deposit when applying for a home loan.

Compared with a low mortgage deposit of 10% or 15%, a bigger deposit of 20% helps reduce your interest rate, monthly repayments, and loan costs.

How Much Deposit Do You Need For A Mortgage In The UK?

The minimum deposit required for UK homebuyers is 5%. This means that your mortgage would cover the remaining 95% of your home’s purchase price. However, in the UK, home loan deposits are generally set at 15% of the property value, or even higher. The final deposit percentage that you’d be required to pay is set by your mortgage provider.

Determining factors

The size of your mortgage deposit depends on several factors, including:

Your credit score
Your monthly income
Your debt-to-income ratio
The property price
The loan-to-value (LTV) ratio of your mortgage
What your monthly down payment will be on your mortgage
The value and condition of the house you want to buy

Borrowers can, depending on their credit history and risk profile, negotiate their home loan deposits with their mortgage lender. This could also be done on your behalf by a mortgage broker or advisor.

Types Of Deposits

Before you get a mortgage, your mortgage lender will first need to determine how much of a deposit you are able to pay and where the funds come from.

This information is needed to start your home loan application and ensures that the money comes from a legitimate source. The UK’s anti-money laundering laws and regulations require them to ascertain that the funds were not obtained through any illegitimate means or illegal activity.

You can use the following funds as your deposit:

Personal savings

Personal savings is the most common form of deposit used by UK home buyers.

Personal savings are most often saved and kept in buyers’ personal bank accounts. These funds are traceable and can be easily assessed for legality. You can also prove legal ownership of these funds quite easily by providing your lender with a bank statement or payslip.

Inheritance

Inheritance funds are also widely accepted by mortgage lenders. As with personal savings, you would also need to provide your lender with proof that the funds have been left to you in a will.

Gifted deposits

While not readily accepted, it is possible to use gifted funds as a deposit. However, lenders will first need to assess the legality of the funds, especially if given by documented friends or family.

Funds obtained from selling a property

You can also use the proceeds of a property sale as a deposit. You will just need to provide evidence of the sale or ongoing sale (if you are still selling the property).

Funds obtained from selling other assets

Selling your car, furniture, or jewellery often delivers a substantial amount of cash that can be used as a deposit. To determine that the money comes from a legitimate sale of assets, your lender will ask you to provide evidence of the sales transactions.

Overseas deposits

Using money transferred from an overseas source or bank account can be complicated when it comes to putting down a mortgage deposit.

Lenders usually consider this on a case-by-case basis after assessing if the money comes from a legitimate source.

If you want to use overseas funds as a deposit, you’ll need to provide your home loan lender with documentation to prove that the money is not illegally obtained.

Credit cards and personal loans

Credit cards and personal loans are not widely accepted as home loan deposits.

However, depending on your circumstances and financial situation, some lenders may allow you to use credit cards and personal loans for your deposit. Using this form of payment, as well as payday loans and other quick financing options, can reduce your mortgage options.

When you need to loan money to pay a deposit (to receive another loan in the form of a mortgage), many lenders may consider your financial situation unhealthy. This would often lead to your loan application being declined.

Using a bridging loan

You can use a bridging loan as a quick way to pay your deposit until you can access a more permanent and secured form of financing. Though a lot more costly than a regular mortgage, it can help you quickly secure your new home until you can access other forms of funding.

Proceeds from gambling

If you spend time at your local casino and manage a big win, you can use your gambling proceeds as a deposit.

Gambling is an expenditure and no matter how much you win, you will undoubtedly lose money. A lender will want to check how often you gamble and how much money you win and lose. This will give them an indication as to whether you’ll be able to service your home loan and make your monthly payments.

How To Save For A Mortgage Deposit

Many future homeowners start saving for their home loan deposits long before buying their first home.

If you are dreaming of climbing the property ladder and becoming a first-time homeowner, use the following tips to cut down on expenses and improve your cash flow:

Set a savings goal: Setting a savings goal could help you stay on track with your finances. Open an individual savings account and regularly deposit your extra cash to start growing your exchange deposit (personal savings deposit).
Start downsizing: If you pay rent for an expensive property, you could move into a smaller home to help you save money.
Consider house-sharing: Sharing an apartment or house with other tenants could help you reduce your spending on rent and utilities.
Get a smaller car: Replacing your current vehicle with a smaller car could help reduce your monthly car payments and insurance premiums. This extra cash can then be deposited into your savings account to grow your deposit.
Declutter: Selling all your unwanted household goods, clothing, and furniture could help you generate additional cash.
Ask your friends and family for help: Moving in with family or friends could help reduce your rent and free up cash to use for your exchange deposit.

Tips For Getting A Low Deposit Mortgage

If you find it hard to save up a large deposit, consider using these options to secure a home loan:

Apply for a government grant or housing assistance scheme. The UK government’s Mortgage Guarantee Scheme helps new home buyers by providing a 5% deposit on their first home.
Consider a shared ownership mortgage. This option allows first-time buyers to buy a portion of a new development while you lease the remainder (which belongs to a UK housing association). Gradually increasing your share to 100% enables you to climb the property ladder and become a homeowner.
Ask your lender for a flexible deposit. Negotiate with your lender to pay a small deposit on the purchase price.

FAQs

What’s a bridging loan?

A bridging loan is a short-term loan used as temporary financing until a more permanent form of finance is secured. A bridging loan is approved faster than an ordinary mortgage but has higher interest rates and fees.

Can I get a 0% deposit?

It’s very uncommon to get a home loan without paying a deposit. Typically, you are required to pay a minimum 5% deposit to qualify for a mortgage.

However, there are some private financiers and shared ownership schemes that would offer home loans with a 0% deposit. Remember, opting to pay a 0% deposit increases your interest rate, monthly payments and loan costs.

What is a loan-to-value (LTV) ratio?

Your mortgage’s LTV ratio shows how much your home loan provider is willing to loan to you in comparison to the value of your new home. A high LTV allows buyers the option to pay a smaller deposit.

Sources:

https://www.natwest.com/mortgages/mortgage-guides/mortgage-deposits.html

https://www.themortgagebrain.net/how-much-deposit-do-i-need-to-buy-a-house-in-the-uk/#:~:text=It’s%20really%20important%20to%20know,the%20UK%20is%20around%2015%25.

https://www.expertmortgageadvisor.co.uk/mortgage-help/deposit-source-for-a-mortgage/

https://www.fool.com/the-ascent/mortgages/factors-determining-mortgage-approval/

https://www.expertmortgageadvisor.co.uk/commercial-finance/bridging-loan/

https://www.lloydsbank.com/mortgages/help-and-guidance/first-time-buyer-help/how-to-save-for-a-mortgage-deposit.html#:~:text=Selling%20what%20you%20no%20longer,you%20more%20money%20for%20saving.

https://www.barclays.co.uk/mortgages/first-time-buyers/guides/how-to-save-a-house-deposit/

https://www.barclays.co.uk/mortgages/shared-ownership-mortgages/

https://www.gov.uk/government/news/government-extends-mortgage-guarantee-scheme

https://www.gov.uk/shared-ownership-scheme/who-can-apply

https://www.moneyhelper.org.uk/en/homes/buying-a-home/government-schemes-for-first-time-home-buyers-and-existing-homeowners#:~:text=Back%20to%20top-,Help%20to%20Buy%3A%20Mortgage%20guarantee%20scheme,in%20the%20event%20of%20repossession.