The biggest question that most first time buyers have is, how much deposit will they need to save until they can buy a house?
With house prices continuing to rise and lending crisis tightening, it is becoming more difficult for people to save the best amount of money they need to buy a home. Many first time buyers are unsure how long they need to continue saving before they can get their desired mortgage.
This guide will tell you everything you need to know about how deposit mortgages work and how much a first time buyer is likely to need for a deposit.
What is a mortgage deposit?
Before you start approaching lenders as a first time buyer, it is essential to understand how house deposit mortgages work. The deposit is simply a lump sum of money that you pay towards the total value of the house.
So what percentage deposit do you need for a mortgage?
In most cases, you will need a deposit of at least 5% but it is recommended that you save for a 10% deposit or more if possible as this will give you more options from the mortgage lenders. You will then borrow the rest of the money to pay for the house in the form of a mortgage, which is paid back in monthly instalments.
The larger the house deposit, the more options you will have when finding a mortgage.
Note: Later in 2021 we will see a return of more 95% mortgages, however, at the moment there are barely any of these products available. You will have more options with 90% mortgage products which will require a 10% deposit.
How much deposit do I need to buy a property?
In most cases, you will be expected to put down a house deposit of at least 5% of the total market value of the house, leaving you with a 95% mortgage. If you can save a 10% deposit you will have much more mortgage products and deal available to you. To get an idea of how much this percentage equates to in real terms, we should consider the average house prices, which varies throughout the UK.
There is a big difference in the average house price in England and Wales, for example. In England, the average house in 2020 cost £256,000, meaning that your 5% deposit would cost £12,800. However, the average house price in Wales is just £173,000, so your deposit amount would be much lower. Average prices in Scotland and Ireland are £155,000 and £141,000 respectively.
Mortgage lenders and lending criteria
It is worth noting that the current coronavirus pandemic has impacted all mortgage lenders and, as they usually are in uncertain economic times, they are being more cautious at the minute. This means that nearly every lender will require a 10% deposit rather than the typical percentage. There are still some 5% mortgages available, but they are more difficult to find at the current time.
Before you start the journey to buy a home you’ll need sound advice on what property price you will be able to afford.
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Talk to a mortgage broker as you’ll need to work out:
- how much impact having a bigger deposit will have
- how it will affect the mortgage interest rates
- how much you need to save
- what your mortgage repayments will be before you apply for a mortgage.
How much deposit do I need for a House UK?
Should I put down more than the minimum deposit?
There will be a need to put a 5% minimum deposit for most mortgages under normal circumstances, it is advised that you save for a deposit of 10% which will get you better mortgage deals. The bigger the deposit you have in savings the more mortgage options you will have as a home buyer. The average deposit mortgage brokers are recommending is 10% at present. The interest rates and more importantly the monthly mortgage repayments to mortgage lenders will also be lower, making it easier to manage your finances in the future.
How many times my salary can I borrow for a mortgage?
A mortgage lender will consider your income when deciding how much they are willing to give you. This is to reduce their risk and ensure that you can keep up with the monthly repayments. In most cases, a mortgage lender will give you around 4 times your annual salary. So, if you earned £25,000 a year, for example, you will be able to borrow around £125,000. If you are hoping to buy a house that is worth £150,000, you’ll need to save a deposit of at least £25,000, which is much more than 5% of the property value (£7,500).
Save a higher deposit for more mortgage options
By saving up to pay a higher deposit, you are able to buy a more expensive home and you have more flexibility when it comes to choosing a mortgage deal. Talk to a mortgage broker who will work out how much you will be able to borrow based on savings and income. Each mortgage lender will have different criteria and will offer a different interest percentage.
Stamp Duty Holiday
The government has put a stamp duty holiday in place, meaning that you don’t have to pay stamp duty on any property worth less than £500,000. This could potentially save you up to £15,000, depending on the property worth, which can be put towards larger mortgage deposits to improve your mortgage options. The stamp duty holiday is currently set to end on 31st March 2021 but there has been talk of extending it.
How does the Help to Buy scheme work?
Most first time buyers are at least aware of the Help to Buy scheme, even if they don’t know exactly how it works. The government created this initiative to make it easier for people to get on the property ladder by lending them 20% of the value of a property, interest free for five years. If you are buying a property in London, they will lend you 40% of the total cost to account for higher property prices in the capital.
If you buy a house through the Help to Buy scheme, you are still expected to save a mortgage deposit of 5% as you normally would. The government will then lend you another 20% of the total property price on top of your deposit. So, for example, if you wanted to buy a house for £200,000 you would need to save £10,000 deposit. The government would lend you £40,000 and you would have a mortgage for the remaining £150,000.
The £40,000 from the government is interest-free for the first five years, after which you have to start paying interest. You can pay the loan back at any time, in instalments or in one lump sum. Any part payments have to be at least 10% of the value of your home.
This scheme is still running until 31st March 2021 for those that have already applied but new applications closed in December 2020. However, the government has announced that a new Help to Buy scheme will come into effect on the 1st April and run until the 31st March 2023.
What deposit do I need for a buy to let mortgage?
If you are buying a home with the intention of renting it out you’ll need a larger deposit. When applying for buy to let mortgages, you will usually be expected to put down at least a 25% deposit. Just like residential properties, you will find it easier to get mortgages and mortgage deals with favourable interest rates if you are able to put down more than the minimum amount.
Some lenders may need a bigger deposit of 40% and there are other requirements before you can get a buy to let mortgage. For example, you will struggle to find lenders that will agree to give you a mortgage if you earn less than £25,000 per year, regardless of the mortgage deposit that you are able to put down. There is also a maximum age limit on most buy to let mortgages and you won’t be approved if you are going to be over the age of 70 by the time the loan is paid off.
What is a shared ownership mortgage?
The shared ownership scheme is designed to help people get on the home buying ladder by buying a house in conjunction with their local housing association. If your household earns less than £80,000 per year and you are a first time buyer, previous house owner that is currently unable to afford a property, or a current shared owner, you qualify for the scheme.
The share you can buy can be anywhere between 25% and 75% and depends on how much you can afford. The housing association then buys the rest and you share ownership of it. In the future, you are able to buy more shares in the property until you eventually own it outright.
Because you are only buying a portion of the home, you can do this with a much smaller mortgage deposit, making it easier to buy your first home. However, you do not own the home yourself and if the price increases a lot, you may struggle to buy more shares in the future.
Can monetary gifts be used for a deposit?
Due to the need to put down larger deposits many young people are now reliant on their parents or family members for the money that they need to get a mortgage. Also, it’s worth remembering the bigger the deposit the lower the monthly repayments will be on your first home.
The increasing cost of rent means that it’s incredibly difficult for people to save, especially if they live in an expensive city. But many first time buyers are unsure whether they can buy a home with money that has been gifted or whether they need to raise the funds themselves.
The short answer is, yes, you can get a mortgage for your first home or subsequent home with a gifted deposit. However, there are some hurdles that you may face because certain banks will not accept any gifted deposit at all, which means that your choice of mortgages is more limited. Some banks also put caps on the amount that is allowed to be contributed by parents. Nationwide, for example, specify that only 25% of the deposit can be gifted by parents and the other 75% must come from the purchasers own savings.
Lenders may also ask parents to clarify that they understand that the money is a gift and they do not expect to own any portion of the property in return and they don’t expect to be paid back at any time. You will find that most banks are also very cautious about monetary gifts from friends.
Can you buy a property without a deposit?
Many people find that they are able to cover the monthly mortgage payments but they cannot get onto the property ladder or housing ladder because they’re unable to afford the deposit. This is why a first time buyer could easily wonder whether it’s possible to get a mortgage without saving for a deposit.
Technically, it is possible to get a mortgage without a deposit, and this is known as a 100% LTV mortgage. The bank agrees to lend you the full amount to purchase without any down payments. Although this makes it easier to get onto the ladder, there are some significant downsides you need to consider.
Firstly, they are more difficult (and the current pandemic climate almost impossible) to get and, in many cases, you will need to use a guarantor. This is somebody (usually a parent) who agrees to cover the cost of the mortgage should you default on the payments. Some banks even require the guarantor to put their own home up as collateral, which is a serious risk for them.
You are also unlikely to get a 100% mortgage if you have a bad credit score or if you have outstanding debts. Even if your credit score is in good shape, banks are unlikely to give you a 100% mortgage until you are completely debt-free.
Negative equity is the other big danger to consider. This is when the value of your home drops and it is now worth less than what you owe the bank. When moving home or attempting to remortgage, this can lead to some significant losses. As you pay off more of the loan, negative equity is less of a problem, but it’s a big danger in the first few years of a 100% mortgage.
What additional costs do you need to cover?
Saving for a deposit isn’t the only thing to consider because there are more costs associated with buying a property and moving home.
Stamp Duty Cost
Although there is currently a stamp duty holiday in place, you need to factor that cost in if you buy a property after that holiday period has ended. All of the mortgage lenders and legal fees that you have to pay during the house buying process quickly add up too. You can expect to pay anywhere from £850 to £1500 in total.
Before agreeing to buy a house, it’s important that you have a survey carried out to identify any potential maintenance issues. The cost of this varies a lot depending on the size of the house and the level of detail that you want, but you can expect to pay a minimum of £400 for a basic survey.
What are the different types of homebuyers survey?
Homebuyer surveys are a good way to avoid surprise repair costs further down the line. There are different types of surveys available and these are
- RICS Condition Report
- RICS HomeBuyer Report
- RICS Building Survey
- Building or full structural survey
- New-build snagging survey
Concluding how much you need for a deposit
What is the minimum deposit?
If you are wondering, how much deposit do you need to buy a house, the short answer is at least 5-10%.
Greater deposit % = greater mortgage flexibility
Putting down a larger deposit is the best way to secure a better interest rate, and it’s important to factor in the added costs when you are drawing up a savings plan as well.
With over 90 different mortgage lenders offering thousands of different interest rates and incentives there is no doubt that the more savings you have the bigger deposit will then give more mortgages available to you.
Free deposit interest
Open a savings account and get saving. There are government schemes like the help to buy savings account that might be worth investigating. Another brilliant Individual Savings Account (ISA) which is popular in 2021 is the Lifetime ISA (LISA).
Frequently Asked Questions
Can I buy a house with £10000 deposit?
So we have already learnt that in most cases, a mortgage lender will give you around 4 times your annual salary. So, if you were looking to get a mortgage with a £10,000 deposit it would need to be at least 5% of the value of the property you are hoping to buy. This means that the overall value of the home would have to be a maximum of £200,000.
Don’t forget that you would also need to suit the affordability of the mortgage. The individual or couple would need to have an overall combined annual salary of at least £47,500.
How much deposit do I need for a 250k house?
Let’s say you have a minimum deposit amount of 5% and are looking to get a mortgage for a property valued £250,000. You would need at least £12,500. You would also need to suit the affordability of the mortgage. You as the sole applicant or as joint applicants would need to have an overall combined annual salary of at least £59,375.