If you’re looking to buy a property, you’ll need a deposit of at least 5% of the property’s value. But having a deposit of 15% or more could help you secure the best mortgage rates.
The average deposit required in the UK is around £33,000, according to financial publication Moneywise, with that figure jumping to almost £115,000 for London and Greater London. Unless you have huge wads of cash lying around, it will take years to save for a deposit on a house.
Despite this, the steadily increasing cost of rent could mean buying a property is cheaper in the long run, not least because your money is going towards something of yours rather than into your landlord’s pocket.
A house deposit is a chunk of cash payable upfront that’s put towards the total cost of a property you’re buying. The lender loans you the rest and that residual amount is the mortgage itself. Like most deposits, it acts as a type of guarantee (to the seller) that you want the property and that you do so at the agreed value.
While the mortgage itself is paid off gradually over a set amount of time (monthly instalments typically over 25 to 30 years), the deposit is paid in one lump sum when you exchange contracts with the seller.
When it comes to mortgage deposits, bigger is almost always better. As the lender does not need to loan you as much money, you’re seen as a less risky investment and the interest rates on the loan will be lower.
There are a few mortgages without a deposit available but in all likelihood, the absolute minimum you’ll need to save is 5% of the property’s value.
The ratio between the deposit and the mortgage is known as the loan-to-value (LTV) ratio. So, if you had a 5% deposit, you’d need 95% from the lender, giving you a 95% LTV.
It’s common for first-time buyers to be offered 95% LTV mortgages, though interest rates won’t be as favourable as for mortgages with lower LTVs (90, 85, 80% and so on).
If you’ve saved £25,000 for a deposit, but will have no savings left over, it could be worth keeping some of it aside to cover any fees and additional moving costs.
The money you do not put towards the deposit could be used an emergency fund should a problem arise once you’ve moved in. However, if you’ve had a proper survey, you should not have any nasty, expensive surprises waiting for you.
Exactly how much you need to save for a deposit depends on the type of property you’re after, how much it will cost, your salary and your outgoings. Once you’ve got these figures in mind, work your way backwards and see exactly how much you could afford to pay on a monthly basis. Search Google for a reliable mortgage calculator to help you with your sums.
There will be a lot of contributing factors at play here, and you’ll need to ask yourself a series of questions to help get a realistic timeframe in place:
If you’re buying alone and will be saving from scratch, it could take you years to save up enough cash for a deposit. Moreover, if properties continue to increase in value in the area you want to live, the amount you’ll need to save will go up too, so bear that in mind when considering how much to set aside.
If you’re buying with a partner or friend, you’ve received some inheritance, or your parents are willing to give you some money towards it, it’ll obviously be quicker to save up, but you might still need to make some changes in your day-to-day life.
Read our full guide on how long it will take to save up a deposit on a home
There are a number of things you can do to speed up the savings process.
Perhaps the most obvious option if you’re currently renting, is to move back home to live with your parents. It may feel like a backwards step but it could help you save thousands of pounds in rent and get you closer to buying your own place more quickly.
Of course, this may not be an option for you (or you might not be able to stand the thought of sleeping in your single bed with band posters adorning the walls), but there are alternatives.
Think carefully about how much you’re currently spending on rent and ask yourself if you could be paying less by moving. Don’t forget to factor in moving costs like agency fees.
If your rent is low enough already, what about your commute? Does your employer offer an annual travelcard loan, which could reduce your monthly outgoings? Could you work from home more instead? Could you swap your car for the bus?
On the flip side, beware of putting every last penny into savings because it will hugely impact your daily life. If you opted for a more affordable property, you’d need a smaller deposit that could be saved up more quickly.
The current top rate easy access savings account offers just 1.5%, or 2.7% for a five-year fixed account, but there are ways to earn 25% on your savings thanks to the government’s Help to Buy and Lifetime ISAs, which we explain more below. However, those schemes require you to actually have money to save – just how do you get to that point in the first place?
Remember, the more you’re able to save now, the less you’ll need to cut back when you’re paying back your mortgage.
For more information, read our in-depth guide on how to build up your savings
Now you’ve got ways to save money from your income, here’s how best to use it:
Help to Buy ISAs are tax-free cash ISAs for first-time buyers looking to buy a property worth under £250,000 (or £450,000 in London).
The government gives you an additional 25% on every £200 (the max you can save each month, apart from the first month you open it when you can pay in £1,200), when you withdraw the money and use it specifically for a house deposit. The deadline to open a new Help to Buy ISA is 30 November 2019.
You cannot open a cash and a Help to Buy ISA in the same year and the maximum payout you can get from the government is £3,000 – you’d need to save £12,000 to get that.
A Lifetime ISA (LISA) is similar to the Help to Buy ISA in that the government pays you a 25% bonus on your savings. Where it differs is that the savings can be used on more than just your first property (costing less than £450,000) because it can also be used for your retirement, which you can withdraw penalty-free only when you’re over 60 years old. Plus, the bonus is paid annually, not just one lump sum when you withdraw it.
The max annual bonus is £1,000 – so you would need to put away £4,000 per year to get that full amount.
Shared ownership is another Help to Buy scheme set up by the government to encourage first-time buyers to get onto the property ladder sooner. It allows you to buy between 25 and 75% of a property, meaning you need to raise a far smaller deposit. For example, if you were to buy 25% of a £300,000 property (in other words £75,000) with a 5% deposit, you’d only need to save £3,750.
Your monthly outgoings would be roughly the same as if you were buying the whole property because although you only pay the mortgage on the part you own, you’ll need to pay rent on the rest.
Guarantor mortgages do not strictly speaking help you save because they use a relative’s money and/or own property to get you your deposit instead.
They’ve changed over recent years and now may require your guarantor to be a joint applicant on the mortgage, though they will not be named on the title deeds – as such, they’re often called “joint borrower/applicant, sole proprietor mortgages”.
The simple answer: yes. Though the process of remortgaging is the same and as in depth as when you first secured your mortgage, how you put together your deposit might now be different to when you were a first-time buyer.
Perhaps back then you would have had to scrape your savings together (and even enlist the help of a relative), but now you’re remortgaging you can use the equity you already have in your home as a deposit.
Provided you’re on a repayment as opposed to an interest-only mortgage, your monthly payments will have reduced your mortgage debt and correspondingly increased your equity.
For example: you first took out a 2.5% two-year fixed-rate mortgage of £270,000 on a £300,000 property, with a 90% LTV. As your initial deposit was £30,000, you own 10% of the property. You’ve since paid off an additional £15,000, so if the property value had remained at £300,000, you now own 15%. Therefore, when you come to remortgage, you could put down £45,000 as a 15% deposit giving you access to a range of 85% LTV mortgages, which should have lower rates than the 90% LTV mortgage you were previously on.
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Last updated: 1 May, 2019
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