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Getting a Mortgage with a low deposit

As house prices in the UK continue on their seemingly ever upward journey, first-time buyers may be left with the feeling that they will never be able to get on the property ladder. Not only do high prices put the average home out of the budget of many, but the deposits required can make qualifying for a mortgage very difficult.

What’s in this article

The good news is that just because you have a low deposit, doesn’t mean you won’t be able to get a mortgage. In this article we’ll look at why a deposit matters, how it impacts the mortgage rate you’re offered, and some of the different routes open to you to help you get a mortgage with a low deposit.

Why do you need a deposit for a mortgage?

Your mortgage deposit is all about mitigating risk for the lender. Imagine you are lending someone £200,000, and your only security is knowing that the item they are buying with the money can be sold to cover your loan if need be. Would you want that item to be worth exactly the amount you’re lending them, or would you actually want it to be worth a little bit more, to allow for the value to go down as well as up and for you still to be able to recover the debt if you needed to?

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Do you get lower mortgage rates with a bigger deposit?

Yes, you’ll usually find that mortgages with lower loan-to-value ratios, (LTVs), come hand in hand with lower interest rates because you’re a safer proposition. The higher the LTV, the bigger the risk and so typically you’ll find that rates go up to match.

You’ll often find that lenders work with rate thresholds, so it’s worth saving that little bit extra if you’re near the edge of a band. For example, if you currently have a 9% deposit saved, taking a little extratime to bring that up to 10% will almost certainly open up a lot more competitive deals.

How much deposit do I need for a standard UK mortgage?

For a typical residential mortgage in the UK you should expect to save a 10% deposit as a minimum. This means that if you want to buy a house worth £250,000, you should aim to save £25,000 as a deposit. The average first-time buyer has a 15% deposit, and the more you can save, the higher your chances of getting your application accepted.

There are all sorts of other smaller costs that can add up too, such as mail redirection, pet sitting and childcare, packing materials, storage and cleaning costs. All of these should be factored into your savings plan alongside your deposit.

Keep in mind too that you will also need to have cash to cover the other costs associated with buying a house, including, but not limited too:

  • Stamp duty
  • Legal fees
  • Survey and valuation costs
  • Broker fees
  • Mortgage arrangement fees
  • Moving costs

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Can I get a mortgage with a 5% deposit?

Yes, although it’s harder to get your mortgage application accepted if you only have a 5% deposit and if you’re looking for a bad credit mortgage you’ll find it even harder. The good news at the time of writing is that the government’s mortgage guarantee scheme has been extended until the end of 2023, meaning there are more 95% mortgage products available.

From a borrower's perspective, there isn’t any difference between a regular 95% mortgage and a 95% mortgage offered through the mortgage guarantee scheme. The difference is for the lender, as they are being incentivised to offer a low deposit mortgage through the government’s guarantee to take on some of the losses should your default.

During the pandemic, when the financial markets and the property market were faced with so much uncertainty, many lenders withdrew their 5% deposit mortgages, meaning many people were no longer able to buy a home. The mortgage guarantee scheme is a response to this, encouraging lenders back into the market by sharing the risk.

Remember that these 95% mortgages do not come with special favourable rates - the scheme is simply about getting more lenders to offer them, not about making them more accessible or affordable. They will be more expensive than equivalent mortgages with higher deposit requirements, so if you are able to save a larger deposit, it can save you a lot of money over the long term.

One of the simplest ways to boost your chances of getting a mortgage with a low deposit is to use a broker. A specialist low deposit broker will have experience of securing mortgages for people without significant savings, and will be able to use their whole market access to find sympathetic lenders.

Can I get a mortgage with no deposit?

If you have no deposit at all then are still mortgage options available, as long as you have financially secure close family willing to offer a helping hand. There are two main options for a zero deposit mortgage, also sometimes called a 100% mortgage - a guarantor mortgage and a family offset mortgage.

With a guarantor mortgage, your guarantor is agreeing to guarantee your repayments should you default. They will usually need to be a homeowner, as the loan will be secured against their property, meaning their home is at risk if you fail to pay.

Family offset mortgages work slightly differently as your mortgage won’t need to be secured against someone else’s home, just against an amount of their savings. These savings are held in an account linked to your mortgage, and you only pay interest on the difference between the loan and the savings, making your monthly repayments cheaper. Once you’ve paid enough from your mortgage that you have a good amount of equity in your home, the savings will be released back to them.

Gifted deposit mortgages

If you’re lucky enough to be in the position where you have a generous family member willing to make you a financial gift to help you buy a house, they could give you the money for a deposit. Although this is a relatively simple way to get a mortgage with no deposit, should they have the cash available, there are a couple of points you need to be aware of.

Firstly, it must be given as a gift and not a loan and they will need to provide a letter or some kind of documentary evidence stating this clearly. Partly this is to make it clear that you are not taking on any extra debt that could impede your ability to afford your mortgage repayments, but also to make it clear that they have no stake or share in the property.

Secondly, be aware of any potential inheritance tax liability. Any financial gifts made to family become eligible for inheritance tax if the person making the gift dies within seven years. Hopefully this won’t be the case but it’s worth at least being aware of.

How much deposit do you need for shared ownership?

If you don’t have family available to offer support, or simply want to go about your purchase independently, then shared ownership could be another way to buy a house with a very small deposit.

Under the shared ownership scheme, you are able to buy just a part of a property, normally between 25% and 75% initially, and then pay rent to a landlord on the remaining share. Over time, you can, if you choose, purchase additional shares - a process known as staircasing - until you own the house outright. You only need a mortgage and deposit, which could be as little as 5%, on the share you want to buy.

Let’s look at an example to show how shared ownership can help you get a mortgage with a low deposit. Let’s say you want to buy a property worth £200,000 and decide to start with a 25% share. For this share you’ll need to pay £50,000, and so could apply with as little as £2,500 as a deposit if you want to get a 95% LTV mortgage.

There are criteria about who can buy a house through the shared ownership scheme and what kind of property you can buy, so check the government website for more information or ask your mortgage broker about how it might work for you.

Are there any ways to boost my savings if I have a low deposit?

Yes, if you are under 40 and a first-time buyer then one easy way to make your deposit go further is by saving it into a Lifetime ISA - also known as a LISA. You can pay up to £4,000 into a LISA every year, and every year you’ll be eligible for a cash bonus of up to £1,000.

For example, if you paid the maximum of £4,000 a year (£333 a month) into a LISA every year for five years, you’d earn a 25% government bonus or £5,000 on top of any interest paid on your savings. You only qualify for the bonus if you take the money out for retirement or to buy your first home, but if you’re confident that you are saving for a deposit then it’s essentially free money, so well worth doing.

Can I borrow money for a mortgage deposit?

No, lenders prefer to see that you have the money in cash for your deposit. This is because mortgage affordability is worked out by looking at your income and your existing credit commitments to see how much you can afford to pay towards a mortgage every month. If you were to borrow the money for a deposit, this would have a big impact on your monthly outgoings as you’d essentially be taking on two large debts at the same time.

This is a red flag to lenders not just because of the impact on affordability, but because it highlights you as a risk taker, or perhaps as somebody who isn’t very good at managing or planning their finances. For you personally, it’s also a big risk, as it leaves you with no margin or error. Go back to our original introduction when we looked at why lenders need a deposit and it’s exactly the same - if something were to happen that meant you needed to sell your home and clear your debts, you may find yourself with not enough in the bank to cover both the mortgage and the loan.

Because of this, many lenders will have a strict zero tolerance policy to the use of personal loans for deposits. If you do find a lender willing to take you on, be prepared to pay higher interest rates for the privilege.

Remortgaging after getting a low deposit mortgage

Although it might feel demoralising having to accept a higher interest rate to get a mortgage with a low deposit, it’s worth reminding yourself that you aren’t always going to be stuck with these higher monthly repayments. Once you’ve been paying off your mortgage for a couple of years and your property has hopefully appreciated a little in value, you will have built up some equity in your home and could be eligible to remortgage at a reduced rate.

Let’s take an example. You initially buy a house for £200,000, with only a £10,000 deposit, meaning you take a mortgage of £190,000 - an LTV of 95%. Two years down the line, you have paid £4,000 off the capital, and the property has increased in value to £207,000. You are now able to remortgage the remaining £186,000 loan, with equity of £21,000, giving you an LTV of just under 90%. This lower LTV will open up lower rates than you originally qualified for and should bring down your monthly repayments.*

Conclusion

Whether you’ve got a hefty deposit lined up or are barely managing to scrape a few thousand pounds together, there are mortgage options available that suit everyone and having a low deposit doesn’t need to be a deal breaker.

With the right support from a mortgage broker and a realistic approach to what you can commit to financially, you should be able to find the right low deposit mortgage for you at a rate you can afford.

*This example is for illustration only and assumes you are not in a fixed term mortgage with applicable early repayment charges.

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