In today’s world of home finance, homebuyers (first time or otherwise) have a wide range of mortgages available to finance their home. Each option will have different requirements in terms of the deposit.
To qualify for a mortgage in the UK, you usually need to have a cash deposit saved to put towards the home purchase, as well as fulfill the lender's criteria. Lenders ask for a deposit to act as a security on the loan; it shows commitment towards the purchase of your home and, most importantly, reduces their financial exposure if you default.
What’s the minimum deposit to buy a house?
In some cases, a deposit of just 5% will be sufficient for a mortgage provider to lend the rest of the property value and make you a homeowner. In other cases, you’ll need a deposit worth 10% or more of the property value before the lender will consider your case.
Does a 5% deposit mean higher mortgage costs?
The interest rates offered to you will vary depending on a number of different factors, such as your credit history and the property you wish to purchase. Among these, the Loan-To-Value ratio (LTV) will no doubt play a big part.
If we consider that the main cost of taking out a mortgage is the interest you pay on the loan, it could be that a 5% deposit paired with a 95% LTV mortgage means higher costs overall. A 5% deposit usually means higher interest rates, as lenders are charging more for a higher Loan-to-Value.
But becoming a homeowner sooner also could mean that it pays off in the long run. Choosing to put down just 5% as a deposit will allow you to get on the property ladder much faster than waiting to save up a higher deposit amount. That means less spent on rent, and you’ll start to build up your home equity sooner. This trade-off is definitely something for you to consider.
What’s the ideal deposit amount?
A general rule of thumb is the less mortgage lenders have to lend you, the better interest rates you can access. In order to unlock their best rates, most lenders require a 20% deposit of the property value. A quick search on a comparison site analysing mortgage rates will confirm this.
The drawback, of course, is that saving a 20% deposit can take many years to save and could be an unrealistic prospect for many. Take the average London home price of £450K, for example. Going from 5% to 20% cash deposit means an average first-time buyer in London has to come up with £90,000 instead of just £22,500. The extra £67,500 will be an impossible ask for most people.
That's why an equity loan, such as the Help To Buy scheme or the Proportunity Loan, can help lower the interest rates on your main mortgage loan.
How can a home equity loan help?
These loans close the gap between your 5% cash deposit savings and banks’ requests for higher deposits to unlock better interest rates.
Using an equity loan, such as the Proportunity Loan, can help get first-time buyers on the property ladder while accessing the best rates offered with only a 5% deposit, instead of requiring a 20% deposit to access the same optimal rates.
What other 5% deposit schemes are available?
Shared ownership is another option for renters wishing to start the homeownership journey. The minimum deposit required here is also 5%. However, the downside is that you will only own a share of the property and will continue to pay rent on the rest.
Isn’t there a way to buy a home with 0% deposit?
Selected lenders have zero deposit mortgages (or rather, 100% LTV mortgages) available which means that you can buy a home without any down payment towards your purchase. Since the 2008 crash, changes in regulations in the UK have resulted in very strict terms for lenders, making 100% LTV mortgages more difficult to qualify for. In most cases, a zero-deposit mortgage will require a guarantor, a third party willing to take legal accountability for any missing loan repayments. The guarantor is the lender’s way of securing the loan in the event of a default by the borrower.
Lenders secure no deposit mortgages in two different ways, both of which are risky to your guarantor.
The first way is through the guarantor’s savings. The lender will set up a savings account with the guarantor where they’ll be unable to withdraw the savings for a set period of time - typically several years. The lender will have a legal charge on the savings during the term of the mortgage. If the purchased property is repossessed or sold at a loss, these funds will be used to make up for the shortfall.
The second way of securing the loan is to use a property belonging to the guarantor. A charge on this property will be placed against a percentage of the loan borrowed, which means both homes are at risk if the buyer misses repayments. The lender will have a legal charge on both properties and can pursue the guarantor for any shortfall if the borrower’s home is repossessed and sold.
Because of their stringent requirements on a third party, 100% LTV mortgages are rarely a viable option for first-time buyers. You'll also likely pay a higher interest rate due to the maxed-out LTV.
What about the property type?
The property type itself doesn’t have much of an impact on the deposit requirements, as the minimum is still usually 5%. The main difference, however, will be made by the property's value.
A home worth £300,000 would need a 5% deposit of £15,000.
A home with £650,000 would need a 5% deposit of £32,500.
Depending on your circumstances, saving this deposit amount can prove very challenging! See our article for tips and tricks on how to save up for a deposit.
How do I know which is right for me?
Deposits are the main blocker to getting on the property ladder for the majority of first-time buyers. Often they are the reason why many professionals are still stuck in the rent trap.
Check out Proportunity's home budget calculator to see how far your current deposit savings will take you, and how much of a boost you could unlock from a Proportunity Loan. This will help you narrow down the rough minimum cash deposit you'd need to save up.
Speaking to a “whole of market” broker about your affordability will also definitely help. Especially when weighing up your financing options, they will be qualified to analyse and compare the different home financing products available across the market, taking into account deposit boost schemes like Proportunity.