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How much deposit do I need for a mortgage?

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Deposit. It strikes fear into home buyers. It’s one of the most talked about parts of buying a house, and the years it takes to save it up are arguably the most difficult part of homebuying. And the biggest deposit question is: how much deposit do I need? Let’s take a look.

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0% deposit mortgages

Over a decade ago, you could get a variety of mortgages with absolutely no deposit at all. Right now though, these are few and far between.

The 0% deposit mortgages that do exist are usually guarantor mortgages

These work by the homebuyer getting someone else – often parents or grandparents – to use their own property or savings as security to cover the deposit percentage. 

Lenders have different rules around who can and cannot become a guarantor. Friends and even aunts or uncles for example are often not allowed. 

Guarantor mortgages are quite risky, especially for the guarantors themselves. This is because if you can’t pay the mortgage, the guarantors are liable to pay it instead. It could lead to losing the home and the guarantors getting into serious financial problems. 

Deposit amount needed for a mortgage

The amount of deposit you need for your mortgage is worked out as a percentage of the value of the house you’re buying. The mortgage is then based off what’s left – the amount you’re borrowing.

So, the largest mortgages you can get are 95% mortgages. This means you would need a deposit of 5% of the cost of the house you’re buying. 

You can work this out by grabbing your smartphone and firing up the calculator. Get the house price, and multiply it by 0.05. 

The average UK house price in February 2021 was £250,341 according to HM Land Registry We will round this down to £250,000 for illustrative purposes.

This would mean the minimum deposit amount you would need for the average house in the UK is £12,500, because £250,000 x 0.05 = £12,500.

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Because your mortgage is a loan, it attracts interest. Less interest means your mortgage is more manageable, keeping repayments under control and meaning you’ll have to spend on buying your house overall. 

The mortgages with the best – the lowest – interest rates are only available when you have a large deposit. So, a 20% deposit will normally get you a mortgage with a lower interest than a mortgage that lets you have a 10% deposit. 

Also, keep this in mind. A deposit of 15% and a deposit for 17% give you access to the same deals. You only get better deals by going up 5% more to 20%. There are no little steps – you open up better deals every time you hit these milestones, 10%, 15%, 20% and so on.

When you get a mortgage deposit of 20%, you really start to get attractive mortgages. 

This means that the recommended minimum deposit size is 20% of the price of your new home. For the average home of £250,000, that’s £50,000. That’s because to work out a 20% deposit on a house, you multiply the price by 0.2. 

So, £250,000 x 0.2 = £50,000.

Loan to value (LTV) explained

You’ll see the phrase ‘loan to value’ or the letters ‘LTV’ bandied around a lot in the mortgage world. 

It’s a way of working out how much you’re borrowing compared to the total cost of the house. You should be aiming for a low LTV, around 80%.

It’s worked out using percentages. It might sound complex, but it’s very similar to working out a deposit. 

All you need is your house price, deposit amount, and the amount your mortgage is for. You can work your mortgage out by just subtracting your deposit from the house price. Then, divide your mortgage by your house price, and multiply by 100.

For example, taking our average house price of £250,000 and our recommended deposit for this house price of £50,000, you’ll have:

Mortgage is £250,000 - £50,000 = £200,000
Mortgage divided by house price is £200,000 / £250,000 = 0.8
Then just multiply by 100 to get the final percentage 0.8 x 100 = 80% LTV.

Remember, lower LTVs mean better interest rates, but also higher deposits. 

You’ll need to know about LTVs when you remortgage your house as well, so it’s not just something for first-time buyers.

Help to Buy scheme deposits

With the Help to Buy scheme, you need a minimum of a 5% deposit. So, on the average house price of £250,000 that’s £12,500. 

Help to Buy works differently to getting a normal mortgage. 

Firstly, it’s only available on houses priced below a certain price, which varies depending on where you live. You can check what the limits in your area here. In Wales the price cap is £250,000 and you are only able to purchase from a registered Help to Buy builder. In Scotland the Affordable New Build scheme stopped taking applications on the 3rd February 2021 but you can find out more about their Smaller Developer scheme There’s no scheme in Northern Ireland. 

It’s also only available on new build properties.

The mortgage you get is for 75% of the LTV of the house. 20% is taken from an equity loan, with the final 5% taken from your deposit.

In London, the 20% equity loan be as high as 40%, so you’d get a 55% mortgage.

The equity loan is the special part of the Help to Buy scheme. 

You don’t pay any interest or fees on it for the first five years. In the sixth year, you’ll be charged 1.75%.

After that, the fee rises by inflation based on the Retail Prices Index (RPI) plus 1% each year.

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