How Much Deposit Do I Need for a House?
Being able to get your foot on the property ladder is perhaps one of the most challenging yet rewarding things you can do. Unfortunately for some, it is a step they are never able to take. Unrealistic costs, stagnant wages and a higher cost of living have all meant that for many, saving for a deposit is out of reach.
So how much money do you need to be able to start making a claim on calling a home your own? Well, much depends on your status as a buyer, are you a first-time buyer? How much do you have saved to use as a deposit?
In the UK, at the time of writing, a 10% deposit for the property you wish to buy is normally enough. However, thanks to a government scheme, there are options where a 5% deposit can secure you a mortgage on your new home.
What is the average deposit for a house?
In most cases, it is advisable to have saved 10% of the property value to use as a deposit, however, you will find yourself on better rates should you be able to bring that saving up to 15% or more of the house value.
Until the end of 2023, a scheme known as the Mortgage Guarantee Scheme is in place where a mortgage can be secured with just a 5% deposit for properties valued up to £600,000. Unfortunately, not all lenders are keen on 5% deposits due to the wavering house market. Instead, most will ask for a 10% deposit as the minimum. It is always best to shop around though as what may appear appealing with one lender could be eclipsed by another. Look for interest rates, deposit % and fees to get a clearer idea of how much you could be spending.
For example, one lender may accept 5% deposits but have many fees and higher rates attached to them. Another lender may only accept a 10% deposit yet have smaller fees or better rates.
Perhaps to get the best indication of how much you need as a deposit, find out how much you could borrow for a mortgage first.
How much can I borrow for a mortgage?
The home you have found may be worth, £300,000 and you may have saved the £30,000 for a 10% deposit but should your circumstances not match the requirements as set out by your lender, you may not be able to purchase the house.
Your circumstances will all be factored into account. This would include your earnings, any debts you may have, any childcare you may pay for and any general personal expenses.
This then gives the lender the chance to see just how much you can afford to pay back. So, if you have substantial outgoings, that deposit may still not be enough to help secure the house you had set your mind on. Most lenders tend to work on the basis of offering 4 times your annual salary but this can vary so take this into consideration too.
Is it better to have a big deposit for a house?
The more you have managed to save, the better position you will put yourself in to receive better rates from mortgage lenders. With more money saved to go towards the house purchase, the bank sees less of a risk in lending you the money.
You will often see the term LTV associated with mortgages. LTV means loan to value, basically the percentage of the house price the lender has loaned you. A 10% deposit for example would mean you have borrowed 90% of the house value. Your LTV comes down as the deposit value increases. Many banks operate within strict interest bands so the interest on an 85% LTV may not be much different to a 90% LTV. The difference between 85% and 80% though could be significant.
Commonly, once you hit the 60% LTV mark you will find the lowest rates. That is a lot of cash to save towards a house purchase though. Using our £300,000 example, you would need £180,000 to put a deposit down.
You could keep saving to bring your deposit value up and this is generally seen as a good idea as you will be saving on interest rates and be at a lower risk of negative equity. On the other hand though, if house prices rise whilst you continue to save, the amount will not contribute towards as much of a percentage of the house as you had initially hoped.
Can you buy a house with no deposit?
We have seen above how in many cases the mortgage lender will cover as much as 95% of the house leaving you to fund the remaining 5% through your deposit.
Could you secure a home with no deposit though and therefore get a 100% mortgage? In a word, yes. There are a few lenders prepared to offer a 100% mortgage meaning you would not need a deposit to help you buy the house.
In the vast majority of cases, where a 100% mortgage is available, it will only be available if you have a guarantor. This means that there is somebody able to pick up the payments should you not be able to afford it.
This can be a risky move, not only are the interest rates much higher than on mortgages operating at 95% LTV or lower but should house prices drop, you could find yourself in negative equity.
Can you get a loan for a house deposit?
Should you have not been able to save sufficiently for a deposit and are scared off by the high interest rates a 100% mortgage will land you with, a loan may be in your thoughts. In general, banks are unlikely to lend you the funds for a house deposit. If they were to approve a loan application for a property, there is still every chance you will get turned down at the mortgage stage. This is because the mortgage lender will see you as now having two substantial debts rather than one and you are using one of those to finance the other.
Could I use a credit card for my house deposit?
In short. No. A credit card cannot be used for a house deposit. An outstanding credit card debt will be frowned upon by mortgage lenders who want to see that the funds you provide them with are not coming from any kind of credit source.
Do you pay a deposit on shared ownership properties?
Shared ownership has been a welcome scheme that has helped many people take their first steps onto the property ladder. With this scheme, you buy part of the property and rent the remaining portion. As you are not buying the entire property, your mortgage value is less which means the deposit required is also lower. This will all be determined by the property value. Using our £300,000 example you can see below the difference it makes:
Property value- £300,000
Purchase share- 45% (£135,000)
Rent share- 55% (£165,000)
10% deposit-£13,500
How much deposit do first-time buyers need?
First-time buyers are those that can often find it hardest to save for a deposit and that is why a few schemes exist to try and help people find their way into the property market. Up until 2020, a first-time ISA was available. The scheme no longer exists for new applicants but for those that still hold an account, the govt will pay £50 for every £200 saved. The bonus is only payable against house purchases so should you spend the money elsewhere; you will not gain your additional 25%.
Another option to consider is a shared equity scheme. You will only have a share in the property and the loan the scheme grants you covers the deposit. A shared equity mortgage can then be issued which covers the leftover value of the property.
Some lenders have set up a mortgage that allows for a very small deposit but one that does require some additional funding. With these, you will need to have at least 5% for a deposit, and then a further 20% from another source. This could be friends or family. Not a credit card or a loan.
Should you be looking to purchase a new house but need to raise the funds to put a decent deposit down, let Gaffsy help. As a leading cash house buyer, we can sell your house fast in a way that suits you. What’s more, we sell your house for free meaning no fees, no commission, and no hidden charges. Get a free cash offer today.
