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Why do you need a deposit for a mortgage?

Why do you need a deposit for a mortgage?
Natalie Poismans

Author: Natalie Poismans - Content Writer

Updated: July 26, 2022

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:

Save, save, save!
Borrow from the bank of Mum and Dad

Put aside a little money every month, just like an acorn grows into an oak tree over time, so will the amount of money in your bank account.

Or any other relatives, just make sure you tell the lender about your cash gift and provide evidence your relatives won’t be asking for their money back. There are even specialist mortgage products that can help you get on the property ladder with family support, such as a guarantor mortgage

 

If you’ve got a partner
Consider opening a lifetime ISA

They can contribute to the deposit and help with monthly repayments.

 

This is a government bonus that can help you save for your first home. From your savings you will get a 25% government bonus if you use the money to buy your first home. For every £4 you save the Government tops this up with a £1 bonus, up to a maximum of £1,000 each year.

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.

If you’d like to know more about mortgage deposits and how they work, take a look at our in-depth guide for all the information you need.

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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