How much deposit do I need to buy a house?
There are a lot of stages in the process of buying a house, which can seem daunting. An essential first step of purchasing a property is working out how much money you will need for a deposit. This article will guide you through how to work this out, explain the different borrowing options and help schemes that are available to you, plus other information you will need such a extra costs involved.
How to work out how much deposit you will need
Before you can purchase a property, you will need to have saved up a deposit. A bank will then use this money as a security for the mortgage that you borrow from them.
It is possible to get a mortgage using 5% of the property’s value as a deposit, but many mortgage lenders stopped offering this during the uncertainty of the Coronavirus pandemic. However, in April 2021 the government created a new mortgage guarantee scheme, which makes it easier to get a mortgage with only 5% as a deposit. A number of banks have decided to offer 95% mortgages.
Despite this, it may still be difficult to find a mortgage lender willing to offer you a mortgage on a small deposit, so it is likely you will receive a better overall deal if you can provide a larger deposit.
Before calculating how much you need to save up for a deposit, work out how much you will need to borrow. If you are planning to purchase a property worth £250,000, you would need the following amounts of deposit:
- 5% deposit – £12,500
- 10% deposit – £25,000
- 15% deposit – £37,500
How much money will I be able to borrow for a mortgage?
The amount of money a mortgage lender will be prepared to offer you to use for a mortgage depends on your existing debts, income and expenditure.
Mortgage lenders will usually assess how much they are willing to offer you by looking at your salary:
- If you are a single applicant, they will usually be willing to lend you four times your annual salary.
- If you are making a joint application, the lender will usually let you borrow three times the amount of your combined salaries, or four times the first salary plus the second salary.
The market rules that govern the mortgage industry allow lenders to consider your personal expenditure including bills and debt. This enables the lender to understand how much you can realistically afford to borrow; they need to be sure you will be able to repay the loan they offer you. Keep in mind that the higher you expenditures are, the less you are likely to be able to borrow.
House prices vary dramatically depending on region and location, and can even change significantly on a street by street basis in some areas. This means the amount of money you will need to borrow to purchase your first house will be determined by a variety of factors.
In general, the south of England is more expensive than the north, while London has higher property prices than any region in the country.
What is loan to value (LTV)?
Mortgages are regularly described as having a ‘loan to value’, which is often shortened to ‘LTV’. In simple terms, LTV represents, as a percentage, how much of the property’s price is going to be covered by the mortgage.
For example, if you purchase a property for £300,000 using a 10% deposit of £30,000, you will need to have a mortgage of £270,000 to cover the rest of the payment. This would result in a loan to value for the mortgage of 90%.
Should I wait and save more for a deposit?
A first time buyer will usually be looking for a 90% or 95% mortgage agreement, which would mean you will need to save a 10% or a 5% deposit.
The important thing to understand about borrowing money is how much risk you will be to the lender offering the money. The bigger deposit you are able to put down, the lower risk you represent to the mortgage lender. This means they are more likely to offer you a bigger range of, often more favourable, deals.
Advantages of waiting for a bigger deposit
- Being able to put down a bigger deposit should put you in a stronger position, as your loan to value will be lower. This is good as the mortgage interest rates are lower for LTV 90% than for LTV 95%.
- The lower mortgage interest rate given to you due to having a bigger deposit will result in lower monthly repayments.
- You will face a lower risk of negative equity if you are able to put down a bigger cash deposit. Negative equity is when the amount of money borrowed against the value of your property is greater than the value of the property.
Disadvantages of waiting for a bigger deposit
- You may be paying rent while trying to save up for a bigger deposit, which can be a drain on your finances that would otherwise be put towards buying a house.
- If house prices increase while you are trying to save up more money, the amount you save will be a lower percentage of the house value when you do get a mortgage.
Is it possible to get a 100% mortgage?
A 100% mortgage means you would borrow the entire value of the property and do not put down any cash deposit. Very few mortgage lenders are willing to offer this type of mortgage, and if they do it is most likely to be a guarantor mortgage. This would require a guarantor to be in place, usually a parent or other family member, who will become legally responsible for paying for the mortgage if you are not able to afford the repayments.
The advantage of a 100% mortgage is that you do not need to save up for a deposit, but this means it carries a much bigger risk. You are likely to face a higher interest rate and monthly repayment.
There is also the risk of negative equity if house prices decrease. The risk is greater as you are dependent entirely on the value of the property; as soon as it starts to decrease you are in negative equity, as you will have borrowed more than the value of the house.
Despite this, a 100% mortgage may be a good option if you don’t want to wait and save up a deposit, and have a guarantor willing to vouch for you.
How to save for a deposit
House prices rise relentlessly, while wages and salaries struggle to increase, which can make saving up for your first deposit challenging. However, there are a range of savings options available to help you save up the necessary funds for a deposit, such as:
- Savings and budgeting apps – a vast array of apps are available to help you save money and budget effectively, which you can use to start stockpiling cash for a deposit. However, it is unusual for these apps to pay interest on your savings.
- Regular savings account – set up a monthly direct debit into a savings account, which will separate it from the rest of your finances and may offer a small return in interest.
- Lifetime ISA – this savings scheme was set up by the government to try and help people purchase a home. You can invest up to £4,000 a year, and the government will contribute £1 for every £4 that you pay in.
- Consider your current expenditure – are you spending too much money, either on buying things or paying rent? Many first time buyers move back to their parents’ house or into a shared house to try and pay less rent while trying to save up for a deposit.
Can my family help with the deposit?
Your family may have the necessary funds to help you out with a deposit, either by contributing some or all of the money. This is called a gifted deposit, and would not count as a loan that you need to pay back. However, the provider of the gift will not own any part of the property for their generosity.
If a family member is able to contribute towards your deposit, it will make buying a house easier and reduce costs, as you will have a bigger deposit. This will result in a lower interest rate and reduced monthly mortgage repayments for the duration of your deal.
Ways to get help with funding your first deposit
As mentioned above, rising house prices and stagnant incomes can make purchasing a property very difficult, particularly when it is your first step on to the property ladder. Fortunately, there are a few options out there that can offer some support and get you closer to securing that all important mortgage.
Some mortgage lenders have started offering mortgage deals aimed specifically at first time buyers, which are designed to be attractive by only needing a small deposit. For example, the ‘Lend a Hand’ mortgage scheme offered by Lloyds Bank requires first time buyers to put down a deposit of at least 5%. They will then need to have a family member or friend, which they call a ‘helper’, to provide savings of an extra 20% of the value of the property. Barclays Bank and Yorkshire Building Society also have similar schemes available to try and help first time buyers make their first forays into the housing market.
A shared equity scheme can offer an alternative way on to the property ladder, which may otherwise be beyond your budget. In a shared equity scheme, you take on a ‘share’ of the property that you buy, using a loan for the deposit amount. You will then be able to get a shared equity mortgage for the remaining value of the property. Despite the name suggesting you will have to share the property with other people, the house will only belong to you. The ‘shared’ part of the name refers to you using an equity loan to contribute towards your deposit.
Help-to-buy ISA scheme
The help-to-buy ISA was a type of savings account set up the government, available from 2013 to 2020. The scheme is no longer taking on new applicants, but if you previously set up a help-to-buy ISA, you can still put money into it and receive the benefits. The maximum you can deposit is £200 a month. If you use your help-to-buy ISA to buy your first home, the government will add 25% of the value towards your deposit. Keep in mind that while you can spend your savings on something else, you will not receive the extra 25% from the government.
Will I need to pay stamp duty?
In England and Northern Ireland, when you buy property or land over a certain value, a tax called stamp duty is levied. There are equivalent land taxes applied in Wales and Scotland, but these have different thresholds.
If you are a first time buyer in England or Northern Ireland, you will not have to pay stamp duty on the first £300,000 of your property, as long as the total value of the property is less than £500,000. You would have to pay 5% of the value between £300,001 and £500,000.
If the property you are buying is worth over £500,000, you will have to pay the same stamp duty as someone who is not a first time buyer:
- For the first £125,000 the stamp duty rate is 0%.
- £125,001 to £250,000 the stamp duty rate is 2%.
- £250,001 to £925,000 the stamp duty rate is 5%.
- £925,001 to £1,500,000 the stamp duty rate is 10%.
- £1,500,001 and above the stamp duty rate is 12%.
Don’t forget to factor in any stamp duty you are likely to have to pay when calculating what property you will be able to afford. Don’t let it slip your mind during budgeting.
Extra costs you may face when arranging your mortgage
Unfortunately, it is very likely you will face additional costs as well as your deposit and monthly mortgage repayments. Make sure you keep the following in mind:
- Mortgage account fee – you have to pay this to your lender, and it covers the cost of administration for your mortgage. The mortgage account fee typically costs up to £300.
- Arrangement fee – this payment is for the mortgage product itself, which can cost as much as £2,000. You be given the chance to add this to your mortgage, which will help you to avoid another up front cost. However, it is likely to increase your overall repayments as you will have to pay interest on this fee.
- Booking fee – this covers the cost of applying for your mortgage. Some mortgage lenders will combine the charges for your booking and arrangement fees, while others prefer to bill them separately. This is not usually a refund able payment, so if you begin the mortgage process and then decide not to take out a mortgage, the lender will not normally give you the money back for the booking fee.
- Valuation fee – this pays for the valuation of the property you intend to buy, where the mortgage lender makes sure that the property is worth the value they are planning to lend you. The valuation fee is determined by the property’s value and can range anywhere between £100 and £1,000.
- CHAPS – this is a Clearing House Automated Payment System. This covers the cost incurred by your mortgage provider when they send money to your solicitor. The CHAPS is usually not refundable, and typically costs up to £50.
Use comparison tools to find a good mortgage deal
It might be tempting to just apply for a mortgage with the bank you use for your bank account and/or debit and credit cards. However, it is a good idea to look around for the best deal. Use comparison tools and search different lenders websites to see what products and deals are available.