You’ll need a deposit of at least five percent (5%) of your property’s purchase price to get a mortgage.
If your deposit is higher than 5%, it will mean you have more mortgage options and lower costs, with the choice improving as the deposit gets bigger. For the best mortgage rates on the market, you will likely need a deposit of 40% or more.
Deposits are per property, not per person. So, if you buy a property with someone else, you can probably save a bigger deposit by combining your resources. Some first-time buyers are fortunate enough to receive cash gifts from their parents or other relatives to help with their house deposit.
How much money do I need to save as a house deposit?
According to Rightmove, the average property now costs £365,173. That means you would need £18,259 for a 5% deposit, and you’d need a mortgage of £346,914 to cover the rest of the asking price.
If you saved a 10% deposit on the same property, that would be £36,517, while a 20% deposit would be £73,035.
That’s a lot of money to save up, and it’s why saving for a deposit is often the biggest challenge first-time buyers face in getting on the housing ladder.
How much money you need to save for a house deposit will depend on where you buy your property. Properties in London and the south east usually cost more than those in English regions and the rest of the UK. The higher the property value, the bigger the deposit you’ll need to save.
Why do I need to save a house deposit?
Lenders prefer borrowers to save a deposit for a mortgage as it shows commitment.
It also lessens the risk for the lender because it means the property can fall in value before it touches the mortgage amount. Thus, in the unlikely event that the property is repossessed and sold, a large deposit means the lender has a better chance of getting its money back.
In the past some mortgage lenders offered 100% mortgages. This meant you didn’t need to save a deposit at all, as you could get a mortgage for the entire value of the home you were buying.
However, since the 2008 financial crisis it’s been very difficult, or all but impossible, to get a 100% mortgage. Lenders have become much more cautious, and 100% mortgages are deemed too risky.
What is my loan-to-value or LTV?
Your deposit is calculated as a percentage of the value of the property you want to purchase. The mortgage you need to borrow can also be expressed as a percentage of the property’s value – this as known as your loan-to-value (LTV) ratio.
The two figures will always add up to 100%. For example, if you had a 5% deposit, you’d need a mortgage at 95% LTV, while if you had a 10% deposit, your LTV would be 90%. The bigger your deposit, the lower your LTV.
Each mortgage product comes with a maximum LTV, which is normally between 60% and 95%. The lower the maximum LTV on a mortgage deal, the cheaper the interest rate is likely to be.
The less money you borrow, the lower your monthly payments will be too.
If you have a 5% deposit, you need to look for mortgages with a maximum LTV of 95%. If you have a 10% deposit, you need a mortgage with a maximum LTV of 90%, and so on.
The cheapest mortgages are only offered to people with an LTV of 60% or less. This would mean saving a deposit of 40% or more. But in most cases, these cheap mortgages are sold to people who are already homeowners and who are remortgaging – rising house prices mean people often have a lower LTV than previously due to the increased equity in their home.
Can I get a 95% mortgage?
Mortgage lenders offer 95% mortgages to borrowers with just a 5% deposit. It was difficult to get a 95% mortgage during the pandemic, but lenders have started lending at this LTV again.
Many homebuyers have taken out a 95% mortgage under a government initiative called the Mortgage Guarantee Scheme. This was launched in April 2021 and allows buyers to borrow between 91% and 95% of the property value, by putting down a deposit of between 5% and 9%.
The government then provides a guarantee to mortgage lenders (worth up to 14.5% of the loan) to encourage them to offer high loan-to-value (LTV) mortgages.
Previously a scheme called Help To Buy mortgage guarantee worked in a very similar way – but it ended in 2016.
The government has announced that the current Mortgage Guarantee Scheme will run until 31 December 2023. It was originally scheduled to close at the end of 2022.
Where should I save my mortgage deposit?
If you’re saving for a mortgage deposit, you might consider opening a Lifetime ISA.
With a Lifetime ISA, the government gives you a bonus of 25% of your savings each year, up to an annual limit of £1,000. This type of savings account is an effective way to save for a house deposit.
To open a Lifetime ISA you need to be over 18 but under the age of 40, and you can add funds up until your 50th birthday. The idea is to use the money either to buy your first home or to fund your retirement after the age of 60.
Keep in mind that you’ll lose the government bonus if you withdraw funds from your Lifetime ISA for any other reason.
If you would save the maximum amount permittable – £4,000 a year – into a Lifetime ISA from the age of 18 to 50, that gives a total of £128,000 (assuming the limits stay as they are), you’d get a total of £32,000 in bonuses from the government.