Got your sights on buying a house? Wondering how many extra shifts at work you’ll need to save a deposit big enough? You’re in the right place!
A mortgage deposit is a sum of money that you pay upfront when you buy a property. In other words, it’s the part of your property’s price that isn’t covered by your mortgage. Here, we’ll look at how much deposit you need to buy a house, to help you on your way to becoming a homeowner.
How much deposit do you need for a house?
Every mortgage lender is different (mortgage lenders are the people that give out mortgages). So, they’ll all have different requirements when it comes to how big a mortgage they’ll give you and how much of a deposit they’ll want you to pay.
That said, most lenders won’t let you borrow more than 95% of the value of the house you’re buying. That means you’ll need to pay at least 5% as a deposit.
This is known as a 95% loan-to-value ratio (LTV) as they’re loaning you 95% of the house’s value. The rest, you’ll need to fork out yourself.
Struggling to get your head around what that means? Let’s look at an example.
Say you want to buy a house worth £200,000. Most lenders will let you borrow a maximum of £190,000 (95% of 200,000 is 190,000). That means you’ll need to pay at least the remaining £10,000 as a deposit.
Now let’s imagine you’re buying a house that costs £500,000. In this case, you’ll need to save for a minimum deposit of around £25,000. This is because your lender will still normally only give you a mortgage for 95% of the property price, which in this case comes to £475,000. Your deposit will need to make up the difference.
If you have at least a 5% deposit, we recommend you get in touch with a mortgage broker (also known as a mortgage advisor). They’re these amazing people who know all about mortgages and can help you get the best deal – we’ll tell you more about them in a bit.
Not sure which broker to use? Use our free find a mortgage advisor service to find the right broker for you, or check out Habito¹, a free online mortgage broker, with great service (here's our Habito review too).
What deposit should you pay for a mortgage?
Okay, okay, so we know we said that you only need to save 5% of your house’s value for a deposit. But that doesn’t mean you should only save up 5%. Ultimately, the more deposit you can put down the better.
Want to know why? Here’s the lowdown.
1. Smaller mortgage repayments
This one might sound obvious, but the more you borrow, the bigger your monthly repayments will be.
Firstly, if you borrow more, you’ll have more to pay back (that’s the obvious bit!). But secondly, borrowing more also means paying more interest – that’s a fee lenders charge you for the pleasure of borrowing their money.
Your interest will be calculated as a percentage of the amount of money you owe your lender each year. If you pay a bigger deposit, you’ll owe your lender less which means you’ll have less interest to pay.
2. Bigger choice of lenders
Not all lenders will want to give out mortgages that are as big as 95%. In fact, a lot of lenders in the UK stopped offering low-deposit mortgages when the Covid-19 pandemic hit, as they were worried about people getting mortgages that they wouldn’t be able to afford to pay back.
Things are a bit better now as the government created something called the mortgage guarantee scheme. The scheme aims to protect lenders who offer 95% mortgages in order to encourage more lenders to do so. It’s set to last until the end of 2022.
However, not all lenders are part of the scheme and many will only lend you around 90% of your house’s value. This means there’ll be more lenders to choose from if you can pay at least a 10% deposit.
So, why is it a good thing to have a bigger choice of lenders?
Well, the more choice you have, the more likely it is you’ll be able to find a cheaper deal. Get in!
On top of that, the more lenders there are to choose from, the more likely it is that there’ll be one who’s happy to lend to you. This is especially the case if you’re self-employed or you have a bad credit score (a score lenders use to see how good you’ve been with money in the past), as you’ll usually have a smaller pool of lenders to choose from already.
3. Cheaper rates
We all want to get the cheapest rates possible, right? Well, lenders tend to reserve their best rates for people who pay bigger deposits. This is all to do with your lender’s risk.
Basically, if you consistently don’t pay your mortgage each month, your lender might want to seize your house and sell it so that they can get their money back (don’t worry, this is the absolute last resort!). If your mortgage covers less of your home’s value, it’s more likely your lender will be able to sell your home for enough to get their full loan back.
In a nutshell, a big deposit is safer from your lender’s point of view, so will come with better rates.
4. More likely to be approved
The size of your deposit isn’t the only thing that lenders will look at when they’re deciding whether or not to give you a mortgage. They’ll also look at things like your income, expenses, credit score and job.
When they’re umming and ahhing about whether or not to accept you, lenders will balance up all of these factors, including your deposit, to decide how likely you are to be able to meet your monthly repayments – this is known as affordability.
Putting down a bigger deposit will help give them confidence you can afford the repayments because the repayments will be lower. But it could be particularly helpful if your application’s not as strong as it could be on other fronts.
Remember how we said that lenders might be less happy to lend to you if you’re self-employed or you have a bad credit score? A bigger deposit might help to ease their worries and make it easier for you to get approved in cases where you might otherwise struggle.
5. Afford a more expensive house
Lenders will normally only let you borrow around 4.5 x your yearly income. This is all to do with that ‘affordability’ thing we just told you about. Lenders won’t want to let you borrow more than that because they’ll be worried you won’t earn enough to keep up with your monthly repayments.]
Say you earn £20,000 per year. You’ll normally be able to borrow around £90,000 (4.5 x 20,000 = 90,000). With a 5% deposit, that means you’d be able to buy a house worth a maximum of £95,000 (technically it’s just under, but we’re rounding up for ease).
However, say you put down £10,000 as a deposit instead. You could now afford a property that’s worth £100,000 (£90,000 + £10,000 = £100,000). This is because you’re topping up the loan from your lender (£90,000) with more money.
The amount of your home that you own outright is called your equity. Think of it as the value of your home that would go straight back into your pocket if you sold it, rather than towards paying off your mortgage lender.
The smaller your deposit, the less equity you’ll have in your property. This could be a problem if house prices in your area go down as you could end up with negative equity.
Negative equity is when you owe your mortgage lender more than your property is worth. It can make things really hard if you want to sell or remortgage in future (remortgaging is when you swap your current mortgage for a new one and can save you a lot of money in the long run).