If you’re looking to buy a home, the deposit will likely be the very first step in your journey – and possibly the last as well.
The amount of money you have available for a deposit has a big impact on how big a mortgage you’re able to get and hence the property you can purchase.
If you can’t get a mortgage than it’s game over unless you’re fabulously wealthy and can buy with cash.
It is possible to get a mortgage without a deposit, or a very small deposit. But it will likely mean settling for a higher mortgage rate.
In this article, we’ll look at the main options, with the help of Kala Sreedharan of mortgage brokers Habito, who works regularly with first home buyers.
Know your LTV
Mortgage lenders care about how your deposit compares to the price of the property.
This is known as the loan-to-value (LTV) ratio and is always given as a percentage.
If a property is worth £150,000 and you’ve got already £30,000 available, you’ll need a mortgage of £120,000, or 80% LTV.
A 100% LTV means you don’t have any deposit whatsoever.
To work out the LTV on any property, divide the size of the mortgage you’ll need by the price of the property and multiply by a hundred.
If you have no deposit
Good news: you can still get a mortgage.
Bad news: it’s going to be expensive, difficult and you’d better be on very good terms with your parents.
Barclays Bank, the Post Office Money and several building societies offer 100% LTV mortgages, but all require family assistance, usually in two forms:
Family deposit mortgages: i.e. Barclays Family Springboard requires your parents to save 10% of the property’s price in a Barclays account.
Provided you don’t miss any repayments they get this money back – but they will need substantial savings.
Guarantor mortgages: such as Post Office Money’s Family Link, include your property and also part of your parents’ place, meaning if you mess up they could lose their home.
This could work out not costing your parents a penny, but they’ll generally need to own their property outright.
Unfortunately, these mortgages are expensive – sometimes twice the interest rate of other deals – which means you may not be able to afford the property you want.
There are also countless ways to slip up.
Individual lenders’ policies vary, but you may struggle to get a mortgage if the property is worth more than £500,000, is a new build, or you’ve got a mark on your credit history – which could be as small as missing a mobile phone payment.
There’s also the risk of negative equity, warns Habito’s Sreedharan: “the risk is that house prices fall, and the house goes into ‘negative equity’ which means that you end up owing the lender money.”
“On top of that, you may struggle to move and end up selling the house for less than you paid for it, losing money in the process.”
Plus, don’t forget that buying a house still requires additional, upfront cash to cover things like Stamp Duty, the solicitor, conveyancing, product fees, survey fees, and moving expenses.
And that’s all before you start thinking about furniture.
If you can save 5% of a property’s price, then your options multiply.
You can just about get a mortgage without any assistance from the family but it’s going to be expensive and have tough criteria.
In fact, according to broker Sreedharan, you might be better off with one of the family deposit mortgages mentioned above.
If you are determined to go it alone then look at the Government’s Help To Buy scheme.
The Government will loan you 20% of the value of the property, or 40% if it’s in London. Together with your 5% deposit, that means you might only need a mortgage of 75% (55% in London) to cover the rest of the property:
You don’t need to pay the Government for the first five years but when you sell they’ll take an equivalent proportion of the property’s selling price.
It’s slightly complicated to get hold of one, however, with only certain properties eligible: read more here.
Another option is a shared ownership scheme; we’ve explained these in a separate article.
10% deposit or above
The world is your oyster...more or less.
You’ll have a wider choice of mortgages, but you’ll generally get a cheaper interest rate with a bigger deposit.
The interest rate really matters, argues broker Sreedharan: “at a 20% deposit, your monthly repayments could be hundreds of pounds less than at 5-10% deposit – which over the years can really add up.”
As a general rule, if you can come up with a 40% deposit you’ll qualify for most of the cheapest deals on the market.
If another year of saving could get you into a lower LTV threshold, then it may be worth the wait.