Having the right amount of deposit to buy a house can make a huge difference in getting the best mortgage deal. There are a number of other factors that could determine how cheap your mortgage deal is, but having a bigger deposit is certainly a major one.
Unfortunately, raising a deposit to buy a house can be difficult even at the best of times. With house prices constantly rising, it can feel like an uphill struggle putting away savings only to find that what you initially thought you could afford is out of reach only a few months later.
For many people, raising a house deposit seems like something you can only do if you are earning a massive salary or you are fortunate enough to have parents able to lend you a helping hand.
And that is quite often the case – it can be very difficult to get together a large enough deposit for the best mortgage deals, especially if you're a first time buyer and are on a modest income.
Ideally, you want to get saving as early as possible, regardless of your financial situation and shop around for the best savings account for you.
In this guide, we explain what the minimum deposit you will need is to get a good mortgage deal, what the benefits are of having a higher deposit and why you will need extra savings left over after paying your mortgage deposit to help with the extra costs of buying a home.
The minimum deposit required for a home will depend on the size of the property. There are a number of different mortgages available on the market such as fixed rate, tracker and variable rate.
Some mortgages are only available depending on how much deposit you have – generally, you will have a wider selection to choose from if you have a larger mortgage deposit.
So how much mortgage deposit do you need to buy a house? Essentially, it comes down to the Loan to Value (LTV) that the bank or building society is willing to offer you on your mortgage.
The Loan to Value is the ratio of mortgage to deposit. So if you had a deposit at 10% of the value of the home, then you would look for a lender to give you 90% LTV – a mortgage covering the remaining 90% of the value of the property.
Although there is not a huge variety of mortgages available in this category, there are mortgages that begin at 95% LTV, meaning you could, in theory, buy a home with just a 5% deposit.
However, as the mortgage provider is taking on a lot of risk, the rate of the mortgage is likely to be more expensive than if you had a deposit of 10% or higher.
It may also be harder to get approved for a 95% LTV mortgage, as you will need to provide solid assurances that you will be able to cover the monthly repayments in full. These mortgages usually take longer to pay back as well.
There are also some government schemes that help to guarantee part of the mortgage to reduce the bank's risk and make it easier for first time buyers to get approved for a mortgage. Read more about help to buy mortgages.
The amount of deposit you have isn't everything when it comes to buying a house. Your income is a huge factor as well.
There is a general rule of thumb – but all mortgage providers have their own set of criteria – that banks will lend you up to four times your salary.
If you are buying with a partner, that doesn't mean you can borrow double, but you may be able to borrow slightly more, depending on both of your salaries and total deposit.
Generally, saving for a mortgage deposit is one of the best ways of getting a cheaper mortgage deal. How much deposit you need will depend on the value of the house you are buying and how much you are earning, as well as your credit rating to let mortgage providers know how risky or safe it is to lend to you.
The biggest benefit of a larger mortgage deposit is cheaper monthly mortgage repayments. Essentially, the higher the amount of your deposit, the cheaper your repayments will be.
As a result, you will be considered to be less of a risk and have access to a wider range of better mortgage deals.
If you want the best mortgage deals on the market, you will probably need a deposit of around 40% or higher.
If your salary doesn't allow you to borrow a large amount, having a deposit of around 40% could allow you to get a cheap mortgage deal and leave you with extra disposable income at the end of each month, so it is definitely worth investing in saving as much as you can and as soon as possible.
Before buying a home, it's important to take a considered look at your financial situation. How much can you borrow on your salary?
Be conservative in your estimates as many other factors are likely to get in the way of you borrowing up to four times your salary. Use that to assess how much deposit you will need and what price range you might be able to afford on the housing market.
Check your credit score before you apply for a mortgage to see if there is a chance of you being rejected for an application because of a negative mark in your history.
Besides the deposit, there are several other costs that come with buying a house. When calculating how much deposit you need to buy a house, consider that you may need to put aside a few extra thousand pounds for all the other costs.
The most obvious one is the stamp duty, which is a tiered tax, meaning you will pay a small percentage of the property value depending on its price range.
On top of this, unless you get a special deal with your mortgage provider, you will have to pay a mortgage arrangement fee, which can be anything between £500 and £2,000.
There are also the legal fees to consider, as you will need a solicitor to help with facilitating the home buying process and you will need to pay for the property survey, as well as the land registry fees.
All of these fees are generally a few hundred pounds each, but it all adds up and can eat away into that cash you had saved up specifically for the deposit.
Keep saving your mortgage deposit and remember that you will need to set aside a portion of that cash for all the other costs when buying a home.