Why do you need a deposit for a mortgage?

So you’ve found it, your dream house and you’re ready to buy, but what’s that nagging feeling in the back of your mind? That’s right; it’s the dreaded deposit for a mortgage! ‘Why do I need a deposit to get a mortgage?’ you might say, ‘In a volatile property market such as this one, how can I make sure I’m putting down enough?’ Well fear not dear reader, because whether you’re a first-time buyer or heading up the property ladder, this article aims to guide you through the why, when and how.

Why do you need a mortgage deposit anyway?

Let’s face it, buying a home is one of the most exciting, yet perhaps terrifying purchases you’ll ever make, and unless you’re flush with cash you’ll need a mortgage. Now because we’re talking about quite a lot of money here, the lender will want assurances that you can actually cover the cost of the loan.

One assurance the lender needs is the mortgage deposit (the other is a credit check which we’ll talk about later), this is a chunk of money that you will need to pay upfront to provide security on your loan.

Back in the day you could get mortgages with no deposits and the banks would give out loans that covered 100% of the property’s value regardless of how much you had in savings. But that was before the financial crash of 2008, and now lenders have become more cautious, expecting you to provide them with a deposit of at least 5% of the total property value. Very few lenders will accept less than this, but if you put down more, you’ll have paid more off of your house at the start.

This could mean lower monthly repayments and potentially less interest on your mortgage. Another reason to put down a bigger deposit is that you will be at lower risk of negative equity.

Great, so you just put down a huge deposit, right?

No, be realistic about what you can afford. Saving for a deposit can take a long time.

Fortunately, we have some tips that can help you get closer to getting that dream home:

Keep in mind your credit report will be checked and if you have bad credit your deposit requirement may rise to 25-30%, however this is dependent on your particular circumstances, so it’s best to seek advice from a mortgage expert.

There are also low deposit options available. If you’re a first-time home buyer, you could seek out a government scheme, such as a Shared Ownership mortgage. These are a cross between buying and renting; you buy a percentage of the property and rent the rest.

Can you get a mortgage without a deposit?

There are still ways to get a mortgage without a deposit. A guarantor mortgage allows a family member or friend to help you out by securing the loan against a property they hold equity in or in their savings.

This of course means the family member or friend needs to have a good credit history and high enough income to qualify, and you will have to bear in mind that if your house falls in value you may be left with negative equity (meaning the value of the loan on your home is larger than the value of the home itself).

It’s also possible to get a mortgage with no deposit in the traditional sense through some of the government support initiatives, such as the Right to Buy scheme.