How do mortgage deposits work?
For the newcomers, we’ll start with the definition of a mortgage deposit.
A mortgage deposit is an amount of money that you pay to purchase a property and is the ‘equity’ you own in it (with the rest of the property bought using a mortgage). Those who are unfamiliar with the property market may get confused when terms like loan to value (LTV) are thrown around. Simply put, the loan-to-value ratio illustrates how much of your home you own outright.
So, let’s say you’ve put down a £10,000 deposit on a £100,000 property, the deposit is 10% and the LTV is the remaining 90%. The mortgage is secured against the latter percentage.
How loan to value (LTV) affects the rates you’ll get
This is why size matters when it comes to residential mortgage deposits – the lower the LTV (larger deposit), the more likely you are to be offered favourable rates by a lender, as they deem the mortgage to be lower risk.
Do I need a deposit to get a mortgage?
In the majority of cases, the answer is yes. Before the 2008 global financial crisis hit, some UK lenders offered 100%+ mortgage deals, but they’re now more cautious.
These days, most mortgage providers have minimum deposit requirements, and the lowest you’re likely to find is 5%. There will be a wider choice of borrowers on offer if you have 10% at your disposal, and the rates will obviously be more attractive if you have 20% or more, which is why it may be in your interest to put down the maximum amount you’re able to stump up.
There are a minority of providers who may still offer 100% mortgages, under specific circumstances, such as when parents or family members provide cash or equity as a fail-safe, or when a 95% mortgage is supplemented by a 5% unsecured loan.
Mortgage deposit rules
When it comes to deposits, different rules apply depending on where the deposit has come from, the minimum amount you can put down, when you’re due to pay the deposit, and what mortgage scheme you’ve chosen (if applicable).
Many lenders would prefer your deposit to come from your own savings as it demonstrates your practicality with money. They’ll also accept gifted deposits, which is a sum of money given to you by a third party (i.e. from close family members).
However, it must be a gift that doesn’t require you to pay it back, and lenders will require both parties to sign a document that includes the gifter’s name(s), the borrower’s relationship with them, the amount in question and a declaration that the sum is indeed a gift with no expectation of repayment.
Minimum deposit amounts
Many lenders require borrowers to put down a minimum of 10% of the property’s value, though this may vary due to circumstances.
Typically, the higher your loan-to-value ratio, the more interest you’ll likely pay – though this doesn’t mean that you can’t get a competitive rate with a smaller deposit.
However, if you have adverse credit, you may be required to put down a larger deposit. For example, if you have a satisfied county court judgement (CCJ), you may get accepted with 75% LTV.
Paying your deposit
You will have to pay the deposit on exchange of contracts; this is typically a few weeks before the purchase is completed and your lender receives the money.
If, for example, you’ve agreed to pay a 15% deposit but circumstances have meant that you’re only able to put 10% down, your application may be cancelled altogether unless you can make up the extra funds from another source.
Help to Buy rules
Whether you’re a first-time buyer or existing homeowner, if you opt for a Help to Buy: equity loan, you’ll need a minimum 5% deposit to qualify. The government will then provide an equity loan of up to 20% of the property’s value, which is interest-free for the first five years. This means that you’ll need to secure a mortgage of up to 75%.
What’s the minimum deposit can I put down?
As we’ve already mentioned, some UK lenders would be willing to offer you a mortgage with a 5% deposit, but these deals tend to come with less favourable rates due to the higher risk the provider is taking on.
Some lenders, therefore, only deal with customers who can stump up a 10% deposit, but there are workaround solutions for those who cannot afford this. The exact deposit you need depends on your situation; if you are considered higher risk, perhaps due to credit issues, then you may need more deposit.
Can I get a mortgage with no deposit?
While lenders who cater for borrowers who have no deposit mortgages are rare these days, they do exist, and they may offer you capital under the following circumstances…
Guarantor and family deposit mortgages
If you have little or no deposit, select lenders might offer you a mortgage if you have a relative or friend who is willing to provide another form of security. To secure the loan, your relative/friend must agree to do one of the following…
- Put their own home up as security: The lender would have a charge on the friend/relative’s home and may even be able to repossess it, depending on how far behind you will with your monthly payments.
- Secure the loan against savings: They could also place a lump sum into a savings account with the provider as an alternative. They won’t be able to draw money from it until the borrower has paid a certain amount off their mortgage, but the savings will accrue interest over time.
This type of mortgage is known as a family deposit or springboard mortgage with some lenders, and there are a number of them who may consider offering them. Some require the borrower to put in a smaller deposit in cash, others have no requirement.
Those looking to get a foot on the property ladder with no lump sum to pay upfront could also explore the possibility of unsecured borrowing, such as a credit card or personal loan, as a means to pay a deposit.
Most lenders frown on this practice, but a select few will accept it, providing you pass their affordability checks. Keep in mind that having an additional loan to repay along with a mortgage is a risky undertaking, for obvious reasons, so it’s important to seek specialist advice before going ahead.
Does bad credit affect the amount of deposit I need?
Yes, it can. Generally lenders require a deposit of 5-10% for a standard mortgage, but if you have bad credit, this can be higher, depending on how recent and how severe the credit problem was – it can rise to between 25-30%, although some lenders may accept less depending on the circumstances.
There are specialist lenders out there who cater for customers with one or more of the following…
- No credit history
- Low credit score
- Late payments
- Missed mortgage payments
- Debt management Schemes
- Payday Loans
However, the list of providers you can approach if you have no deposit and bad credit is smaller than for borrowers with credit problems alone, so it’s vitally important to seek specialist advice from a whole-of-market broker, like the ones we work with to avoid unnecessary mortgage credit checks which could harm your credit score.
So, can I get a mortgage with no deposit and bad credit?
Unless you qualify for one of the family deposit mortgages (mentioned above), you’re almost certainly going to need a deposit. The one exception to this can be with some shared ownership purchases, where a handful of specialist lenders offer 100% deals with some credit history issues.
To find that specialist, it’s important to have access to the whole of the market, including mortgages for people with bad credit and a small deposit. Luckily, the independent advisors we work with have this access.
Getting a mortgage with a low deposit
Approaching a lender with a low deposit (for example 5% deposit) comes with a measure of uncertainty as you’re unlikely to get the most favourable rates, but there are options available for the many who are struggling to get a large deposit together, and they include:
Low deposit mortgages through Help to Buy
The government’s Help to Buy scheme is aimed at borrowers who would otherwise have trouble getting a deposit together for a mortgage.
Those eligible for the initiative can take out an equity loan which goes towards cost of their deposit (up to 20% of the property’s value or 40% in London), interest-free for a period of five years. The borrower then puts down 5% of their own money and takes out a mortgage for the rest of the property’s value.
Low deposit mortgages through Shared Ownership
Shared Ownership mortgages allow borrowers to buy a percentage of a property (usually between 25-75%) while a local authority or housing developer takes on the remaining share. You will pay rent on the portion of the building you own, which means a smaller mortgage and therefore smaller deposit requirements.
For example, rather than having to hand over a £5,000 deposit for a £100,000 property, if you only owned 25% of said property the deposit would be a more affordable £1,250. Shared Ownership and Help to Buy are just two of the options available to prospective property owners with low deposits.
What are acceptable mortgage deposit sources?
The table below offers a rundown of the deposit sources UK mortgage providers typically accept, and should give you an idea of how widely accepted they are across the lender spectrum:
||How Widely Accepted It Is
|Own personal savings / investments
||Every lender is happy with this, although some are picky and require the proof of your increasing balance over time.
||Usually required to be from a family member (parents, grandparents, siblings, uncles, aunts, step family etc), although in certain circumstances one or two lenders may well accept a gift from someone not related (such as a close family friend or other explainable source). Gifts from a third party are usually NOT acceptable because of the risk of money laundering and fraud. However, it is possible with some lenders Enhanced due diligence checks will usually take place looking into the source of funds and sometimes ID verification checks on the donor can even be required.
||Most lenders will accept this without problem as long as the inheritance is about to be paid or is going through probate. They are unlikely to accept a future inheritance from someone who is still alive as wills can be changed or their circumstances change.
|Sale of property
||Usually no problem so long as the property proceeds aren’t under charge by someone else. Obviously, they must be clear funds at the time of completion.
|Sale of other assets
||Other assets such as cars, boats, valuable memorabilia, artwork, or just about anything legal that is to be sold, may be acceptable to use as deposit with some lenders. The issue is when there is the suspicion of money laundering, as lenders, advisors, and solicitors have a duty to ensure all funds are from a legitimate source.
||Unsecured borrowing means credit cards and personal loans etc. and raising deposit using them will not be acceptable with most lenders, however one or two are happy with it.
||Bridging finance is very short term borrowing which enables customers who need to buy before they sell, or who are buying on a very short term basis. It’s a pricey arrangement with rates between 1-3% a month! (@ 2% a 100k loan = 2k a month!).
||Be careful with this. Some lenders may have an issue with this if gambling is a regular occurrence. It has been known for lenders to go through bank statements and deduct regular gambling withdrawals as monthly commitments, deducting this from available income and influencing affordability, even if you regularly win!
|Deposit from overseas
||This is a tricky one for most lenders because it can be really difficult to trace the origin of the cash in order to be satisfied it’s legitimate and not at risk of money laundering. As a result, you may find many lenders declining the application. Some lenders do have a flexible approach and will consider overseas deposits if for instance they are in established bank accounts and the money can be traced from a legitimate source. This is really on a case by case basis so get in touch if you have more questions and want to know which lenders will consider your application.
||Most lenders will turn you away if the origin of your deposit is Crypto Currency, such as Bitcoin, but a small minority may consider this acceptable.
How do I provide proof of deposit?
Providing your mortgage lender with proof of deposit isn’t always straightforward as the evidence you must give varies depending on the source of the funds.
- Savings: Most lenders will require three to six months’ worth of statements from your savings account to show the funds building up over time. Extra checks to trace the origin of the capital may be needed if the source is overseas.
- Sale of shares/assets: Most lenders will ask for a valid transaction statement from the organisation you sold the shares/assets through, as well as a bank statement showing that the funds have transferred across to your account.
- Sale of a property: The majority of lenders will request your latest mortgage statement and a memorandum of sale from the estate agent. Once the deal has gone through, a conveyancer’s letter confirming the sale may be requested.
- Gifted deposits: Lenders will usually accept a gifted deposit from a parent or other close relative. It is important that the person doing the gifting understands that they cannot expect the money to be returned or that they will have any interest in the property. Not many lenders are happy with gifts from third parties (friends etc) but there are some that can consider it. Most people have to complete a ‘gifted deposit letter’ to confirm this. ID checks on the donor are sometimes requested, as well as financial statements from both the donor and the beneficiary confirming that the funds are changing hands. Some lenders will also insist on seeing evidence of the money building up in the donor’s account over a period of time.
- Redundancy/inheritance: Usually straightforward as most lenders will be happy with a bank statement showing the funds entering your account. In the case of an inheritance, confirmation from an employer/solicitor may also be needed.
- Personal loans: Although many lenders are wary of customers whose deposit source is a personal loan, the minority who do accept this will be satisfied with a copy of the loan contract and a bank statement showing the funds going in.
What are the benefits of a large mortgage deposit?
Lenders take many factors into account when determining your eligibility for their mortgage products and working out whether you can afford them. They’ll look at your income, age, credit score and outgoings when establishing how much of a risk you are as a borrower.
The amount of deposit you put down, however, is often a deciding factor when it comes to locking down the most favourable rates.
A larger deposit often means lower interest rates
The larger your deposit, the less you’ll need to borrow, and this often means ending up on a lower interest rate.
To ensure you end up on some of the most attractive rates, a deposit of at least 20-25% is recommended, but lenders tend to offer the best deals to customers with over 40% deposit. Anything in that ballpark is considered a good mortgage deposit, although it may be possible to lock down favourable rates with less, providing you pass the other eligibility checks.
You’ll also have access to a wider range of lenders
If you’re in a position to put down a large mortgage deposit, can theoretically take your pick where choice of lender is concerned, providing you have a clean credit history, steady income, and pass the provider’s other eligibility checks. Select lenders will even offer you capital if you’re income is low but your deposit is high.
There are, however, many lenders out there and the advisors we work with have whole of market access and can connect you with the ones offering the best deals to customers with large deposits. For more information, make an enquiry or consult our dedicated article on large mortgage deposits.
Banding thresholds for mortgage deposits
Lender mortgage products on offer for customers are banded in multiples of 5% (5%, 10%, 15% deposits and upwards). If you had a deposit of 31%, you would qualify for the 70% loan to value (LTV) products, for example.
Obviously, there are attractive deals on offer for customers with 20%, 25%, 30% and 40% deposits, but whatever the amount is you’re aiming to put down, the mortgage you will be offered based on your deposit will depend on which lender you approach.
How much deposit do I need if I’m buying another property?
Those in the market for a second home may be asked to put down a higher deposit than those buying their first residential property, as borrowers who already have a mortgage are sometimes considered higher risk since their outgoings are higher.
Most second home mortgages require a deposit of at least 25%, but some lenders might ask for more depending on your income (i.e. whether it’s sufficient to cover both mortgages simultaneously) and whether there are any variables that makes the deal more risky, such as bad credit.
At the other end of the scale, a minority of lenders may go as low as 15% for borrowers who tick all (or at least most) of the boxes on their eligibility and affordability checklists. For more information, consult our dedicated article on second property deposits.
A secured loan might be a viable alternative
It’s also worth noting that anyone with an existing property might be able to beef up their deposit by remortgaging or drawing cash out with a secured loan, before pressing ahead with the new purchase. That way, any equity they release could go towards the deposit for home number two, and any existing mortgage can stay in place. Often, secured loan lenders can be more flexible when it comes to who they lend to, and how much, so if a main mortgage lender won’t lend to you, it can be a great solution.
How much deposit do I need for a buy to let property?
Deposits for buy to let properties are typically higher than for residential and many UK lenders have a minimum requirement of 25% of the property’s value. There are, however, some which will accept 20% and a handful that can offer with just 15%.
Do I need a deposit for a concessionary purchase mortgage?
A concessionary purchase is where a property is knowingly being bought for below its market value. Examples include buying from a relative for a discounted sum, an employee buying from their employer and a private tenant buying from their landlord.
Some lenders can consider the discount as the deposit, and will not require the buyer to put any cash into the purchase (although some do still require cash as well in certain circumstances). For example, if the property value is £125,000 and the purchase price is £100,000, then some lenders will lend the full £100,000 with no cash deposit needed.
Do I need a deposit for a commercial mortgage?
Yes! In most cases, commercial lenders will ask for a deposit to minimise the risk involved.
Commercial deposits typically range between 20% and 40% of the asset’s value, but there are a number of factors that can cause that percentage to rise or fall, such as…
- The type of commercial property you’re buying – whether it’s a pub, office building, shop, petrol station or another type entirely. Some lenders consider these property types higher risk and may ask for a larger deposit.
- Affordability: the lender will establish how much you can realistically afford to borrow after looking over your credit history and balance sheets. If they offer a smaller loan, then a larger deposit will be needed.
Commercial lenders usually secure the loan against the property you’re purchasing, so if they offer 75% LTV, for example, you will need to stump up the rest as a deposit.
If you don’t have that kind of cash, it’s not uncommon for the lender to seek additional forms of security to safeguard the loan. Deposit requirements for commercial investments can be higher than for a residential mortgage and, depending on the property type, some lenders may ask for more than 40% of the asset’s value.
Mortgage deposit FAQ’s
In this section, we answer some of the questions our customers most frequently ask us about mortgage deposits.
What’s the difference between a mortgage deposit and a home deposit?
These two terms can be used interchangeably, so don’t be duped into thinking a mortgage deposit is a different entity to a home deposit. The majority of the time, your lender will simply refer to it as a “deposit”, in any case.
When do I pay my mortgage deposit?
The deposit is usually due upon the exchange of contracts, which generally falls several weeks before the transaction is finalised and the money from the lender comes through.
The exchange deposit – which amounts to 10% of the purchase price – is payable at the point of exchange and is non-refundable in the unlikely event of the deal collapsing at this late stage. This forms part of the final deposit amount and is not something you have to pay in addition.
For instance, if you’re putting down at 15% deposit, you will initially pay 10% of it to serve as the exchange deposit and the other 5% upon completion. The only exception is if you have a 95% mortgage, in which case the full 5% deposit is usually payable at the point of exchange.
Do I need a deposit to get a mortgage in principle?
Not usually. It will be assumed at the point of initial application that you have the deposit you say you have. Evidence will be required before you make the full application.
How do I pay my mortgage deposit?
Your deposit is payable to your solicitor and you need to make sure the funds have cleared a day or so ahead of the exchange date. As for how you go about transferring a mortgage deposit to a solicitor, a bank transfer will be acceptable in most cases.
Do you get your mortgage deposit back?
If the purchase has gone through, then no (unless you want to borrow it and release some of the equity). This is obviously not possible for those with negative equity, but if you sell the property at a profit, you can recoup some of the capital you put down.
Do I need to pay extra deposit if I’m porting my mortgage?
Some mortgages are portable, which means you can transfer them from one property to another, although you’re essentially reapplying for the same product and must go through the standard affordability checks and may be liable for exit fees.
You would basically be porting your mortgage deposit along with the mortgage itself when moving house, but be aware that you may have to add more funds to your deposit if you’re moving to a more expensive property.
For example, if you’re moving from a property worth £100,000 and have a mortgage for £75,000 that you wish to port over to a £160,000 house, you may be advised to find extra deposit or take out an additional ‘top-up’ mortgage product. As your £25,000 equity would equate to a 15% deposit, this could mean less favourable rates than the mortgage on the previous property (which was at 75% loan to value).
Are mortgage deposit rules different around the UK?
Generally speaking, no. The factors which determine what size your mortgage deposit needs to be, and where it can come from, are no different in London compared to any other location in England and Wales. The same can be said of the other British countries as the rules around mortgage deposits are essentially the same in Ireland and Scotland.
Talk to a mortgage deposit expert today
If you have questions and want to speak to an expert for the right advice, call us on 0808 189 2301 or make an enquiry. We’ll then match you with an advisor who can answer any questions you may have and/or find the best mortgage rates for your deposit size.