Raising enough money to purchase a home can be a daunting prospect to say the least - whether you're a first-time buyer, taking your first steps up the property ladder, or even an experienced buyer. Securing a good deposit is a key part in getting the best mortgage deal possible, but it can be difficult to know just how much you should set aside, particularly in such a volatile property market as the current one. So, why is a deposit important when buying a property, and how can you make sure you're putting down enough? In this article, we aim to answer these questions.
Why is a deposit important when buying a house?
A house is likely to be the most expensive purchases most people will ever make, and few can afford to buy their property with hard cash. That's where mortgages come in: the lender (in most cases a bank) agrees to pay for the property on your behalf, and you're required to pay this loan back over a fixed period - typically 20 or 30 years. But in order to prove to the lender that you're able to cover the cost of this loan, you'll must provide a few assurances. For one, you'll need to submit to a credit check to ensure that your credit rating is sufficient to qualify for your mortgage. The lender will also do a thorough check on your finances to ensure that you can afford the monthly repayments. And you'll need to provide a deposit as security on the loan you're taking.
Before the financial crash of 2008, banks regularly gave out loans that covered 100% – or more – of the property's value, regardless of how much money the applicant had in savings. After the recession hit, lenders became much more reluctant to provide loans, and required deposits became more substantial, with no-deposit 100% mortgages becoming a thing of the past. As a consequence housing markets around the world crumbled, property prices crashed, and many people were left owing more in mortgage repayments than their houses were worth.
Today, banks are more careful about providing mortgages. In most cases, your bank will only agree to finance a mortgage if you can provide a deposit of at least 5% of the total property value, with very few lenders looking for less than this. However, the golden rule of saving for a deposit is the bigger, the better.
How big should my deposit be?
Always think of your deposit as a percentage of the total cost of the property you're purchasing. If you're buying a house for £250,000, for example, you'd need to put down a minimum of 5%, or £12,500. However, if you can afford a larger deposit that will mean a smaller monthly payment for your mortgage or a shorter term at the same monthly repayment, because you're borrowing less from your lender. You'll also probably pay a lower interest rate on your mortgage as the deposit you lay down (as a percentage of your total) gets bigger.
To determine your mortgage rate, banks classify mortgages according to their Loan-to-Value (LTV). This means that if you put down a 10% deposit, you'll require a 90% LTV mortgage. Many lenders work out your mortgage rate according to the LTV band that your mortgage fits into - as a rule of thumb, a deposit up to 15% (anything over an 85% loan) will be charged the highest rates, and rates offered will then drop as deposits rise to 40% (60% loan), with a few lenders providing the best rates at up to 50% deposit. These bands exist because customers who pay a larger deposit are of less risk to the bank. The more equity you have in the property from the start the more likely you are to be able to cover the remainder of your mortgage if your property loses value.
Affordability is key when deciding how much deposit to put down: a bigger deposit means your mortgage rate and monthly repayment will be lower, but you'll need to consider how big a deposit you can make comfortably. On average, first-time buyers put down a 17% deposit when buying property (with those moving house who already have a deposit putting down 30% and people remortgaging offering a 47% deposit), but be realistic about what you can afford. You might have £50,000 in savings, but it's ill-advised to empty your account on a 30% deposit if 15% would be enough to ensure a comfortable monthly repayment. It's also important to remember that there are likely to be other costs involved when buying your home - like stamp duty and other legal fees, for example - so take this into account when working out how much you're comfortable to part with on your mortgage deposit.
So, to sum up, there are a few things to bear in mind when putting down a deposit on your new home:
- Always think of your deposit as a percentage of the price of the property
- Regardless of the price of the property, you'll always need to put down a deposit of at least 5%.
- The bigger your deposit, the cheaper the monthly payment on your mortgage.
- A bigger deposit is better - but don't stretch yourself beyond your means.
- There are bound to be extra costs, like stamp duty and legal fees, so make sure you factor these in when deciding on how much to deposit.
How can I afford a house deposit?
Saving for a deposit can take a long time, particularly if you're looking at buying your first property. This might seem intimidating, but if you base your plans on a clear goal and keep working towards it, you'll get there. Here are a few helpful tips to bear in mind when saving for a deposit on your new home:
- Research property prices to get an idea of what the home you're looking for might cost.
- Manage your savings actively . If you haven't already, open an ISA account. This will allow you to save up to a certain amount per year tax-free. If you've already maxed out your ISA savings for the year, a regular savings account is the next best thing. Check your account at least once per year to ensure you're getting the best possible interest rate.
- Work out how much you'll be able to borrow according to the amount of money you earn - a mortgage calculator like ours is an invaluable tool here.
- If necessary, re-evaluate your plan: you might have to consider a smaller home or a more affordable area if it becomes clear that your target monthly payment is not achievable.
- Make sure your credit score is good. Mortgage providers will check your credit record to ensure you're credit-worthy, and bad credit means it's unlikely your mortgage will be approved.
- Speak to a qualified Mortgage Adviser. If you're ready to go ahead then check your eligibility and how much you can afford on our Mortgage Calculator and then you can discuss your requirements with our team of qualified mortgage advisers who are always ready to help.
If you don't have enough saved to put down a deposit on the house of your dreams, don't worry: there are plenty of options.
Loans from Parents or Family
If you're a first-time buyer, the Bank of Mum and Dad or other family members might be willing to provide cash gifts in the form of informal loans or cash payments, or formally lend you enough to pay the deposit on your home.
Buying with Friends or Family
If borrowing from family isn't an option, consider buying together with friends or family to raise capital for your deposit. However, be careful here - it's advisable to draw up contracts and have a clear understanding of what will happen in the event that one party wants to sell their share in the future.
Buying with a Partner
If you're married or in a long-term relationship, your partner can contribute to the deposit, and possibly allow you to put down enough to ensure a more comfortable monthly payment on your mortgage deal.
If you're ready to investigate the mortgage you can afford and how much deposit you will need then, check out our Mortgage Calculator to get started - it's easy to use and won't affect your credit score. And, of course, happy house hunting!