As house prices continue to rise across the UK, saving for a mortgage deposit is becoming an increasingly challenging hurdle for prospective homeowners. With confusion over how much is needed, where the money should come from, and how deposit sizes impact mortgage offers, this guide will provide clarity on everything you need to know about mortgage deposits in the UK.
What is a Mortgage Deposit?
A mortgage deposit is an upfront payment you make when buying a property, which reduces the loan amount you’ll need to borrow from a lender. It is usually a percentage of the property’s value, and the more substantial your deposit, the better terms and rates you can expect to receive from mortgage providers. The deposit is also the buyer’s initial financial stake in the property, reducing the risk for the lender.
For example, if you put down a £10,000 deposit on a £100,000 property, the deposit represents 10% of the property’s value, leaving you to take out a mortgage for the remaining 90% — this is referred to as the loan-to-value ratio (LTV).
How Does Loan-to-Value (LTV) Affect Your Mortgage?
The loan-to-value (LTV) ratio is a critical factor in determining the mortgage deal you’ll receive. It represents the proportion of the property’s value that is covered by the mortgage. A higher LTV means you’re borrowing more relative to the property’s value, while a lower LTV suggests a larger deposit and less risk for the lender.
For instance, if you’re buying a £200,000 property with a £20,000 deposit, your LTV is 90% (since you’re borrowing 90% of the property’s value). If you were to provide a £40,000 deposit, your LTV would be 80%.
Why LTV Matters
Lenders offer better interest rates to borrowers with lower LTV ratios because they are considered less risky. A higher deposit (and lower LTV) makes you more likely to qualify for favourable interest rates. Conversely, if you have a smaller deposit and higher LTV, you may face higher interest rates because the lender is taking on more risk.
It’s always advisable to use an LTV calculator to understand what your loan-to-value ratio will be, based on the property’s price, your deposit amount, and the loan required.
Do You Always Need a Deposit for a Mortgage?
In most cases, yes, a deposit is required to obtain a mortgage. However, the minimum deposit amount can vary based on your circumstances and the type of mortgage you’re applying for. Pre-2008, some UK lenders offered 100% or even 100%+ mortgages, but after the global financial crisis, lenders are more cautious.
Today, the smallest deposit most lenders will accept is 5%, but the options become more favourable if you can save at least 10%. Having a 20% or more deposit can secure you the best interest rates and more flexibility when choosing a lender.
Minimum Deposit Requirements in the UK
For most residential mortgages, the minimum deposit required is between 5% and 10% of the property’s value. However, if you have a poor credit history or are seen as a higher-risk borrower, you may need to save more — sometimes as much as 25-30%. The higher your deposit, the more likely you are to secure better rates.
Example Breakdown of Deposit Requirements:
- 5% deposit: Generally the lowest deposit you can put down. Available through schemes like Help to Buy, but comes with higher interest rates.
- 10% deposit: More favourable than 5%, with wider choice in lenders and better rates.
- 20% deposit: Typically secures more attractive rates and a broader range of lender options.
- 25%+ deposit: Ideal for securing the best interest rates, as lenders view you as a low-risk borrower.
Paying Your Deposit
The deposit is typically paid at the point of exchanging contracts — a critical stage in the property buying process. This usually happens a few weeks before the transaction is completed, and your lender finalises the mortgage. If you’re unable to pay the agreed deposit at this stage, your mortgage application may be cancelled unless you can make up the difference from an alternative source.
Help to Buy and Government Schemes
If you’re struggling to save for a deposit, there are government-backed schemes designed to help, particularly for first-time buyers. The Help to Buy equity loan scheme allows buyers to put down as little as 5% of a property’s value. The government provides an equity loan of up to 20% (or 40% in London), which is interest-free for the first five years, meaning you only need to secure a mortgage for the remaining 75%.
Other options include Shared Ownership, which lets you buy a portion of a property (usually between 25% and 75%) and pay rent on the remaining share. With a smaller share to buy, the deposit requirement is reduced.
Deposit Requirements for Borrowers with Bad Credit
If you have bad credit, securing a mortgage may require a larger deposit. Most lenders in the UK ask for a deposit of around 5-10% for standard mortgages. However, borrowers with poor credit may need to offer 15-30%, depending on the severity of their financial history. Lenders take extra precautions to mitigate risks with borrowers who have experienced issues like:
- No credit history
- Low credit score
- Late or missed payments
- Defaults and CCJs (County Court Judgments)
- IVAs (Individual Voluntary Arrangements)
- Debt management plans
- Repossessions
- Bankruptcy
- Payday loans
Some specialist lenders cater to those with a poor credit history, but they often require larger deposits as a safeguard against the potential risk of default. While the pool of lenders for individuals with bad credit and no deposit is smaller, it’s not impossible to find one, especially if you have expert guidance from a whole-of-market mortgage broker. These brokers can identify lenders who will work with your specific situation without damaging your credit score through unnecessary checks.
No Deposit Mortgages for Bad Credit
It is incredibly rare to secure a mortgage with no deposit if you have a poor credit score. However, some lenders may offer family deposit mortgages or shared ownership schemes as alternatives, allowing you to purchase a property with a smaller deposit. In these cases, it’s crucial to have access to specialist brokers who can navigate the more limited lender options available.
Low Deposit Mortgages: Help to Buy and Shared Ownership
For those with a small deposit, government schemes like Help to Buy and Shared Ownership can provide vital support:
- Help to Buy: This scheme allows buyers to put down a 5% deposit, with the government offering an equity loan of up to 20% of the property’s value (40% in London), interest-free for the first five years. This means you would need to secure a mortgage for the remaining 75% (or 55% in London).
- Shared Ownership: This option enables you to purchase a share of the property (usually 25-75%) while paying rent on the remaining portion. As the deposit is based on the share you’re buying, it’s typically more affordable. For instance, rather than a £10,000 deposit for a £200,000 property, you may only need £2,500 if purchasing a 25% share.
Both of these schemes are ideal for first-time buyers or those struggling to save up a substantial deposit.
Acceptable Sources for Mortgage Deposits
When it comes to proving your deposit, UK mortgage lenders are typically stringent about where your deposit comes from, as they need to ensure the funds are legitimate and not sourced through illegal means. Common sources include:
- Personal savings: Every lender accepts this, though they will want to see bank statements showing the accumulation of funds.
- Gifts from family: Lenders generally accept gifted deposits from close family members, provided they supply a signed declaration confirming they don’t expect repayment or an interest in the property.
- Inheritance: Inheritance is widely accepted, particularly if it is going through probate and close to being paid out.
- Sale of assets: Whether it’s a car, shares, or another asset, this source is usually accepted, but you’ll need proof of the sale.
- Other property sales: Selling another property to fund a deposit is common, and lenders will want to see documentation such as mortgage statements and proof of sale.
More unusual sources, such as cryptocurrency or overseas funds, may be more difficult to use for a deposit as lenders need to verify the legality of the funds. It’s important to note that some lenders are more flexible than others in accepting non-traditional deposit sources.
Proof of Deposit
Once you’ve secured the funds for your deposit, the lender will need evidence that the money is available and sourced legitimately. Here’s a breakdown of how to prove the origin of your deposit:
- Savings: You will need to provide at least three to six months of bank statements showing how the savings have built up over time.
- Gifted deposits: A ‘gifted deposit letter’ must be signed by the person giving the gift, confirming it is not a loan and that they have no financial interest in the property.
- Sale of assets: Lenders will need a valid transaction statement and proof of the funds being transferred to your bank account.
- Inheritance: A letter from a solicitor confirming the inheritance, or a statement showing the funds arriving in your account, will suffice.
- Redundancy pay: Proof of redundancy, along with statements showing the payment, will be required.
The Benefits of a Larger Deposit
While it’s possible to get a mortgage with a smaller deposit, there are distinct advantages to offering a larger sum upfront.
- Lower Interest Rates: Lenders tend to offer more favourable interest rates to borrowers with larger deposits because they view the loan as less risky. A deposit of at least 20-25% often unlocks the best rates, though some lenders offer even better deals for those who can afford a 40% deposit or higher.
- More Lender Options: With a higher deposit, you’ll have access to a wider range of mortgage products and lenders. This increased competition among lenders means you’re more likely to get a good deal.
- Lower Monthly Payments: Since you’ll be borrowing less with a larger deposit, your monthly mortgage repayments will be lower. This can make your mortgage more manageable in the long term, reducing financial pressure and the risk of missed payments.
- Increased Equity: The more significant your deposit, the more equity you will have in your property from the outset. This can give you greater financial security, particularly in times of market fluctuations, as you’ll owe less on your mortgage relative to the property’s value.
Deposit Requirements for a Buy-to-Let Mortgage
Deposits for buy-to-let properties are typically higher than those for residential homes. Lenders generally require a deposit of at least 25%, though some may accept 20%, and in rare cases, 15%. However, putting down a larger deposit may help you secure better interest rates and reduce your monthly repayments.
If you’re purchasing a second home or buy-to-let property, your deposit needs might differ from those buying their first home. Lenders typically require higher deposits for these types of properties because they view them as riskier due to the additional financial burden.
Summary
Saving for a mortgage deposit is one of the biggest challenges UK homebuyers face. Whether you’re aiming for a minimum deposit of 5%, dealing with bad credit, or seeking the best rates for a larger deposit, it’s essential to explore all the options available to you. Understanding how loan-to-value ratios (LTV), government schemes, and deposit sources work can help you make more informed decisions when purchasing a property.
For expert guidance, speak to a professional mortgage advisor who can tailor advice to your unique financial situation. Mortgage Knight is here to help, providing expert advice and access to the whole of the market to secure the best mortgage deal for you. Whether you’re a first-time buyer or looking to expand your property portfolio, contact Mortgage Knight today to take the next step in your property journey.
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