Deposit-free mortgages that cover the full value of a house are a thing of the past. These days, deposits are essential to pay off a part of the amount upfront and show your commitment to the mortgage itself.
Your deposit to buy a house plays a more significant role than the security deposit typically needed for renting a property. You have a certain amount of choice which will affect your mortgage and the repayments you make for years to come.
So, how much deposit do you need to buy a house?
How much is the minimum deposit to buy a house?
The minimum amount of deposit you need depends on the lender of your mortgage, and how willing they are to ‘take a risk’ on lower percentage deposits.
Typically, the smallest deposit you will be able to place today is 5%. This is ideal for those who can’t afford the large upfront cost that a deposit requires – after all, 5% of a £200,000 house still means a £10,000 payment before lending can begin – but is offset by the fact that you’re borrowing more from your lender. This likely will mean a longer repayment term, or larger repayments over a shorter term.
In the past, there were mortgages that demanded no deposit from you. As of the 2008 financial crisis, these mortgages disappeared. Banks and lenders played a much safer game from then on, though 100% mortgages are showing signs of making a return. These are not the same as they were, however, and current offerings involve a ‘temporary’ deposit.
How much deposit do I need to buy a house in 2022?
The amount of deposit you’ll need depends on the percentage you plan to pay. The minimum you need is 5%, but it’s worth considering how feasible it is that you could afford a higher percentage.
Paying a larger deposit means better rates offered by your lender, and less to borrow against your mortgage in the first place. The remainder is called the loan-to-value. If you pay a 20% deposit, that leaves a loan-to-value (LTV) of 80%, representing the split between the amount you’re borrowing and your equity (the amount that you own through the money you’ve already paid).
The average deposit for a first-time UK buyer is around 15%, which is a healthy amount to prove low risk whilst staying within reach of many people who are in the position to buy a home.
Is a 10% deposit enough for a house?
A 10% deposit is the standard amount for first-time buyers, and would be enough for most lenders to consider.
10% is a popular amount as it’s substantial enough to get your foot in the door in terms of equity, whilst being in the reachable amount for first-time buyers to save up. Larger deposits have their benefits as mentioned above, but a 10% deposit should be plenty for a first-time buyer hoping to get a mortgage.
Of course, this depends on the market value of the home you’re looking to purchase, though this is somewhat limited by the checks and evaluations done by lenders and mortgage advisers. A lender will likely not be interested in a single first-time buyer who is aiming for a property for which they could barely afford the monthly repayments.
If you are unsure about the amount you wish to pay as a deposit versus the value of the house and what it would mean for a mortgage, it may be best to get the help of a mortgage adviser who can help you lay out the facts and perhaps get you a mortgage in principle. Also known as an agreement in principle, these give you a forecast of what a lender would likely offer you in your current situation, though they are not set in stone and are more of an estimate than a quote.
What is a good amount for a house deposit?
The current average may be 15%, but this does not mean that you need to have 15% of a house’s worth in your pocket before anybody will talk to you. First-time buyers are often unable to produce so much money upfront, and many people can only afford their first home through help from family, gained inheritance, or other means outside of their usual income.
A 10% deposit is a good start as it gets you a tenth of the way there (relatively speaking) and shows lenders that you do not have the bare minimum at 5%. Remember, lenders evaluate you on risk first and foremost, and they’re looking for evidence that you’re a worthwhile investment.
A mortgage adviser could help you ascertain a good amount based on the lenders that interest you, and it may be a good idea to go as high as you can comfortably spend without hindering your ability to pay for other expenses that inevitably arise with a house purchase, such as conveyancing fees.
Should I save for a bigger deposit?
There is rarely a need to save for a deposit bigger than the minimum being asked by the lender. Doing so can give you the aforementioned benefits of better rates and a more manageable mortgage – either through smaller monthly repayments or a shorter term – but paying a larger deposit is almost always a choice that you can take freely.
A mortgage adviser may recommend a slightly larger deposit based on their specific knowledge of a lender’s policies, or it may be that a slightly more attractive deal becomes available to you with a 15% deposit over 10%.
It’s not uncommon for first-time buyers to feel financial strain in the process of buying a house, but it’s important that your money is still being managed wisely and that you’re not simply draining your accounts.
How to save for a house deposit
Saving for a house deposit is, in theory, as straightforward as saving for anything else. However, the relatively large amount of money needed for a deposit to buy a house means that you may be saving longer or with more drastic cuts than normal.
Reducing your largest outgoings as much as possible can make all the difference whilst saving for a deposit. This could be payments tied to a car, either for the car itself or for tax and fuel. If you’re able to commute to work on foot, via (affordable) public transport, or by bicycle, this could easily save you considerable money over time.
If you’re currently renting as you save up for your deposit, think about the ways through which you could reduce your rent or outgoings. This could be a move from a property you rent alone or as a couple, to something you share with other tenants. Some landlords will take a lump sum of rent every month that covers your contributions to utilities, internet, and tax.
Be aware that if you rent a property and there is a spare room, you mustn’t simply let that room out to somebody else as a way of collecting your own rent. This is known as subletting, and many landlords will forbid it in their contract with you, or else require that you obtain their permission for it. Your landlord could seek legal action against you if you sublet a room illegally. Check your tenancy agreement first and ask the necessary questions to your landlord or estate agent.
Certain government schemes may help you in the process of saving up for a deposit. The UK government’s Help to Buy ISA scheme has been closed to new accounts as of November 2019, but there are other ways that you can apply for certain reliefs that might make buying your home that bit more manageable.
Help to Buy equity loans only apply to newly built homes in the UK, but they will see government lending of up to 20% of the cost of your home. This means a smaller deposit and therefore smaller mortgage repayments, which could provide some respite if you cannot save as much as you like or if your finances are set to improve in future, but aren’t quite where you need them yet. Note, however, that the schemes available for your situation will change depending on your location in the UK.
House deposit for first-time buyers
Being a first-time buyer can put you at a slight disadvantage when it comes to taking out a mortgage. Lenders need to assess the risk that you represent, and many first-time buyers have never undertaken anything on the level of financial responsibility that securing a mortgage represents.
People who are self-employed or work on a freelance basis will also find that they are more likely to have a mortgage application refused compared to those in more ‘secure’ employment situations. For this reason, some might find that a larger deposit is necessary to show that they are a more trustworthy investment for lenders.
It’s not uncommon for first-time buyers to receive help with their deposit from family. This can sometimes be a cause of concern for lenders, as other parties having financial interests in the property can complicate matters if disputes were to arise.
Noting the cash as a gift along with verification from the person who gifted it will remove this complication, and your mortgage advisor or the lender themselves can show you how to do this.
House deposit for a second home
Getting a second home mortgage can be complex, despite already having secured a mortgage on your first home. With one property already mortgaged, lenders may see somebody in the market for a second mortgage as a very attractive investment.
At the same time, second mortgage shoppers may be perceived as higher risk precisely because they already have an existing mortgage to be responsible for. As a result, some lenders may need a higher deposit starting at around 20% of the second property’s value. Some may take the equity of your first house into account, but each lender is different.
If the second home is somewhere abroad, it’s highly unlikely that a UK-based lender will help you. Typically, you would need to source a mortgage from a lender based in the country of the house you’re looking to purchase.
House deposit for buy-to-let mortgage
Buy-to-let mortgages are for properties that are bought as investments. Since these are business transactions that differ from the concept of buying a home to live in, mortgages for them are slightly different.
Buy-to-let mortgages are commonly interest-only, meaning the borrower pays the monthly interest for the duration of the mortgage term. Once the mortgage term ends, the capital amount – the mortgage amount in full – needs to be repaid. This could be paid from savings or by selling the property itself.
Buy-to-let mortgages typically need higher deposits, usually around 25% of the value and above. The interest rates also tend to be higher than those on residential mortgages.
Understanding deposits with Mistoria Estate Agents Salford
We are a Propertymark-accredited firm with a wide range of properties in Salford and the surrounding area. Our friendly and knowledgeable staff can help you get on the road to buying your next home in Salford and securing the right deposit to buy a house.
To find out more about our services and how we can help, contact us today.