Understanding Mortgage Deposits: Your Key Questions Answered
Looking to buy a property but not sure how much you need to have for the deposit or, even, what counts as a deposit? Let’s dive into some most common questions we get asked on that front.
What is a deposit?
A mortgage deposit is the initial lump sum payment you make towards the purchase of a property. The remainder of the property cost is the mortgage.
The deposit amount is often expressed as a percentage of the property’s total value.
How much deposit do I need for a mortgage?
Typically, you’ll need to have at least 5-10% of the property value as a deposit but this will depend on few things:
- The type of property you’re buying – (for example, house or a flat)
- Your financial circumstances
- The mortgage lender’s minimum requirement
Example – deposit for a £250,000 house
If the property you’re buying costs £250,000, a 5% deposit would be £12,500, whilst a 10% deposit would be £25,000, a 15% deposit would be £37,500, and so on. It’s worth remembering that the bigger your deposit is, the more likely you are to secure a cheaper mortgage.
The deposit doesn’t include the other costs of buying a property, which we cover in another article the Costs of buying a home.
What is a 1% mortgage deposit?
At the time of writing, the current government is considering introducing 1% deposit mortgages as a means to allow more people to get on the property ladder. It’s aimed at those unable to save large deposits, but already have the income to get a mortgage.
It’s seen by some experts as an election year headlines-grabbing move, which could lead to another housing bubble. We will likely find out in the 2024 Spring Budget on the 6th March whether this goes ahead or not.
Whatever happens, such low deposit mortgages will mean higher interest rates on your mortgage. So do weigh up whether it’s worth waiting and saving more for your deposit, or whether you’re happy paying more interest but owning your house sooner.
Can you get a mortgage without a deposit?
A no deposit mortgage, sometimes known as a ‘100% mortgage’ is possible, although the lender currently offering these has additional eligibility criteria. As the lender is putting up 100% of the value of the property, it is quite risky to them, so the rates are typically higher than if you have a 5% deposit or more.
It also isn’t without risk to you. If the property falls in value, you may find yourself in ‘negative-equity’, which means the value of your home is less than the amount borrowed. This could make it difficult to get a good mortgage deal in the future, at least until the value of your home is higher than the remaining balance of your mortgage.
100% deposit with the help of your family
You may also be able to get a 100% mortgage if assisted by a family member. They will either be required to deposit a sum of money in a savings account, in place of having a deposit, or use a property they own as additional security to the lender.
In simple terms, their money is only returned to them once you have paid enough off your mortgage, or when the value of your home has increased sufficiently. This, obviously, carries a number of risks for both parties and would need some serious consideration before you make any arrangements.
What can I use as a mortgage deposit?
You can use a combination of savings, gifts from family, inheritance, or equity from a sale of another property as your mortgage deposit. Proof of the source of your deposit will usually need to be seen by your solicitor, so you’ll need to show your bank statements.
If any of the deposit has been gifted to you, your family member may need to complete a form, or sign a letter confirming the amount they’re gifting, and that they will have no legal interest in your property.
If your deposit is coming from the sale of a property, proof of sale of your other property may be required. Or, if the sale is still going through, a document confirming the agreed sale, called a ‘Memorandum of Sale’ can be used.
Talk to your mortgage broker about your deposit options
If you’re unsure how much you need for your deposit, give us a call. We’ll take you through a number of scenarios, looking at lower and higher deposits and how they would affect what mortgage product you’d be on and what your repayments would be. Every situation is different and we’re here to guide you through it.
Your home may be repossessed if you do not keep up repayments on your mortgage
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Categorised in: Information and advice
This post was written by Steve Moses