One of the most important aspects to take into account when thinking about buying a new home is how much deposit you need for a mortgage. The size of deposit you are able to put down will affect a number of factors including the mortgage deals that you’ll have access to and, consequently, the cost of your monthly mortgage payments. Here, we take a look at a few of the things you’ll need to consider when it comes to mortgage deposits.
How is a deposit calculated?
A deposit is the difference between the purchase price of a property and the amount you take out through a mortgage to fund the purchase. Conversely, the amount you borrow on a mortgage in relation to the purchase price is known as the loan-to-value (LTV) ratio, expressed as a percentage.
For example, let’s imagine you are buying a property for £200,000. You have a deposit of £20,000 available, and are taking out a mortgage for £180,000. In this case, the deposit is 10%, and the mortgage you take out would have an LTV of 90%.
Lenders will typically only offer mortgages up to a set maximum LTV. Today, the maximum LTV mortgages available on the market are generally 95% – therefore, requiring a deposit of at least 5% of the purchase price. However, some lenders may restrict borrowing to, for example, 85% or 90% LTV. (See our section below for information about 100% mortgages.)
Crucially, mortgage deals offered by lenders are often tiered by LTV ratio, meaning that you may have to put down a larger deposit to qualify for the best deals. If you have had credit problems in the past, lenders may also require you to put down a larger deposit, in order to minimise their exposure to risk. For a similar reason, certain types of specialist lending, for example buy-to-let mortgages, often require a larger deposit than is typically demanded for residential borrowing – for example between 20% to 40%.
How Does the Size of a Deposit Impact Your Mortgage?
As mentioned above, the size of your deposit will affect the range of mortgage lenders and the overall range of mortgage schemes that you will be able to access. As a rule of thumb, having a larger deposit will give access to both better mortgage deals and a wider range of lenders, while conversely a small deposit will limit the options available to you and will likely mean that you will have to pay higher interest rates.
Therefore, the size of the deposit you are able to put down will directly affect the size of your mortgage payments over the term of the mortgage. As a larger deposit means lower mortgage payments, this can also work to your advantage when the lender is carrying out affordability checks to decide whether to approve your mortgage application.
There can be other advantages to putting down a larger deposit. As it means you own a larger portion of the property outright, this reduces the risk of the property falling into “negative equity” as a result of house prices falling – negative equity occurs when the value of a property falls below the amount that you owe on your mortgage.
Is It Possible to Get a Mortgage Without a Deposit?
Historically it was possible to borrow 100% of the value of a property and therefore buy a home without putting down any deposit whatsoever. However, in the past decade, stricter mortgage lending criteria effectively put an end to 100% LTV mortgages, as they represent a much higher risk to the mortgage lender. More recently, a small number of lenders have introduced new types of deposit-free mortgages which allow 100% borrowing, but these do have other contributing factors in relation to the lender’s security. For example, in certain circumstances, a portion of the loan would be secured against the home of a family member.
How Just Mortgage Brokers Can Help
Whether you have a small or large deposit, Just Mortgage Brokers will endeavour to help find the most relevant mortgage for you. We have access to exclusive deals from both high-street lenders and smaller, specialist providers and could help you find the mortgage that best suits your unique circumstances.
You can also use our mortgage calculators to get an idea of your eligibility for a mortgage and the amount you may be able to borrow. Please note that our calculators are an estimate and we cannot guarantee that the amount calculated will be applicable in your circumstances. If you would like to discuss your needs in more depth with one of our mortgage advisers, please get in touch with our team.