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Help with Mortgage Deposits

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By Pete Mugleston   Mortgage Advisor

Last updated: 3rd December 2018

How to Get a Deposit for a Mortgage

Loads of first-time buyers approach us to ask how much deposit they will need when applying for a mortgage, and for advice on what they can do to help them save. If this sounds familiar, you’ve come to the right place.

Although the amount of deposit is dependent on your circumstances, there are plenty of options out there to help you on your way to saving. So, if you’re looking for help with your mortgage deposit, read on. In this article we’ll be covering:

How Much Deposit Do I Need to Get a Mortgage?

In short, the more deposit you have saved, the more favourably you will look to lenders and the better rates you’ll be offered.

Provided you have a good, clean credit history, you’ll need to have a deposit of at least 5% of the value of the property. For example, if you want to buy a house that is on the market for £280,000, you’d need a minimum deposit of £14,000.

However, if you can raise a higher deposit for a mortgage, the more offers and most competitive interest rates you’ll receive. This is because lenders perceive buyers with larger deposits as lower risk than those with a smaller sum. So, if you’re in the position to save up to 10%, 15% or 20%, you’ll receive offers from more lenders and benefit from lower interest rates than if you had only saved 5%.

Can Government Schemes Help With a Deposit for a Mortgage?

In the UK we’re fortunate enough to have the government’s support when it comes to getting help with a mortgage deposit. The most popular schemes are:

  • Help to Buy Lifetime ISA
  • Help to Buy Equity Loan
  • Forces Help to Buy
  • Shared Ownership

Saving For a Deposit With a Lifetime ISA (LISA)

The Lifetime ISA (LISA) is available to any first-time buyer between the ages of 18 - 39. You can open one up and save up to £4,000 per tax year into it, either in chunks or as a lump sum, and the government will add a 25% bonus on top of what you save. So, save the full £4,000 and you’ll receive an extra £1,000.

Once the LISA has been held for 12 months+, first-time buyers can then use the money towards the deposit for any residential property, provided the value doesn’t exceed £450,000.

It is called a Lifetime ISA because, after you’ve used the LISA to save towards your first home, you are able to keep it open and continue paying in as a way to save for retirement.

How to Raise a Deposit With a Government Help to Buy ISA

The Help to buy ISA is open to any first-time buyer over the age of 16 and works in the same way as a LISA in that the government adds a 25% bonus on top of your savings. However, you can only “earn” a maximum of £3,000 in total with a Help to Buy ISA, whereas the LISA offers potentially £32,000.

There are pros and cons for each, with the Help to Buy offering slightly more flexibility. For example, if you wanted to, you could transfer the money and if you decide not to buy a house you can cash in the ISA at any time; although you won’t get the government bonus but will still benefit from the interest.

The main downside is when you can access the bonus money - you only receive it on completion of a purchase rather than at exchange, where buyers would typically put down a deposit.

How to Raise a Deposit With a Government Help to Buy Equity Loan

The government Help to Buy equity loan scheme allows you to buy a property with as little as 5% deposit saved, alongside the help of a government-assisted loan. Alongside your deposit, the government will loan up to 20% of the property’s value. In Greater London, this has been extended to 40%, and both are available to both first time buyers and current homeowners looking to move.

This means that a buyer only needs to get together a 5% mortgage deposit to be eligible, and the government will give you a “top up” on the rest. This means far less pressure to get together a large down payment, as essentially you have a 25% (55% in London) deposit together, which is looked at far more favourably by buyers. You will then take out a mortgage for the remaining amount.

Raising a Deposit With the Forces Help to Buy Scheme

If you’re a regular service person in the armed forces, the Forces Help to Buy scheme may enable you to borrow up to 50% of your salary to a maximum of £25,000, interest free. This loan must be put towards buying your first home, or moving to another property as your circumstances change.

In order to be eligible, regular service personnel must:

  • Have completed the prerequisite length of service.
  • Have more than 6 months left to serve at the time of application.
  • Meet the outlined medical categories.

However, there may be instances where exceptions to the standard rules may apply, specifically for extenuating medical and / or personal circumstances.

It’s also useful to know that other government-backed housing schemes can be used together with Forces Help to Buy scheme.

Raising a Deposit With the Shared Ownership Scheme

Shared Ownership is another government scheme helping you get a larger deposit together, and is predominantly aimed at first time buyers and lower income households (currently £60,000 or less combined income per year). Shared Ownership allows you to buy a share (usually between 25% - 75%) of a resale or new build home, and alongside you pay reduced reduced rent on the remaining share. Later on down the line, you have the opportunity to buy a bigger share if you wish, but bear in mind that Shared Ownerships are always leasehold properties.

Other Ways to Save Up for a Mortgage Deposit

If you’re not eligible for any of the government schemes above, there are still options available to you to help get you saving for a deposit on a mortgage. Banks offer a variety of regular savings accounts and ISAs which can pay good levels of interest, and you can even earn some impressive rewards with a regular current account:

Savings Accounts

Regular savings accounts tend to pay attractive rates of interest and are a good way to ensure you set money aside each month. However, there are limitations on how much you can save, as well as other restrictions. Typical examples include having to have a current account with the same bank, limits on how many withdrawals you can make, and you may receive less interest if you were to miss a month of savings.

Cash ISAs

A cash ISA is a standard savings account where any interest you receive on is tax-free for the duration of its term. As long as you are over the age of 16, you can open up a cash ISA and pay in up to £20,000 each tax year. Even better, fixed-rate cash ISAs allow you access to the cash within the term, unlike normal savings account - although you may lose some interest in doing so. Even if you withdraw early, ISAs can be a solid option to help you save a for a mortgage deposit.

Current Accounts

As a way to attract new customers, some bank accounts offer interest rates that are competitive (or even better) than many easy-access savings accounts or ISAs. While the rates will be appealing, these accounts tend to be quite demanding of their customers.

For example, you may have to pay in at least a set figure each month, have a certain number of direct debits coming out, and pay a monthly fee for the “service”. Some banks may also decrease the interest rate after the first 12 months.

Which Other Bank Schemes Can Help With Mortgage Deposits?

Certain providers offer specialist mortgage options designed to help struggling first time buyers, and there are several popular schemes out there including the “Lend a Hand” and “Family Springboard” schemes. The team we work with have specialist knowledge in this area, so get in touch if you think you may be eligible.

These schemes allow a first-time buyer’s relatives, usually their parents, to use their savings to help them buy a home.

Typically the buyer will need to contribute a minimum of 5% deposit, and then a family member may add an additional 10% of the market value of the property into an interest-bearing account, which may be accessed after three years, providing all the mortgage repayments have been made on time.

Each lender has minimum deposit requirements and different rates, but if you’re in a position where a family member is able to help contribute to buying your first home it’s definitely a viable option.

Boosting your deposit with such schemes can open you up to a greater range of lenders, as well as more competitive rates, which may save you a lot of money in the long run.

How Do Loans and Credit Cards Affect My Mortgage Application?

Most of us have taken out some form of credit in our lives, whether that be for a mobile phone, retail credit card or student funding. If you’re in this situation you may be asking yourself how you will go about finding a deposit for a mortgage, as many people believe that having any kind of debt against your name will ruin your chances of being accepted - but that isn’t necessarily the case.

Lenders will look at many different factors when assessing your eligibility. They will look at your debt-to-income ratio, as well as how many and what types of credit you owe. Some types of loan are seen as lower risk, such as a reasonable monthly credit card bill or car finance.

The main factor, if conducted correctly, will be the impact on affordability, as any commitment to make ongoing payments will reduce the disposable income available to make mortgage repayments.

Will a Payday Loan Affect My Mortgage Application?

Some loans on the other hand are a big no-no for many lenders; for example, having even a fully repaid payday loan on your record could prevent you from being accepted for another loan for over 12 months with many lenders.
But it’s not all that black and white – some specialist lenders are interested in the story behind the debt, and look at the bigger picture if it’s not a recurring instance.

For example, if you can pinpoint and explain a one-off event such as a family illness or emergency home renovation that was responsible for an emergency loan, you will be looked at a far more favourably than someone who is constantly maxing out multiple credit cards due to overspending.

So, don’t fret if you’ve racked up a bit of credit card debt or have a long-term loan to repay; provided you have good credit history and can prove you can afford these repayments alongside a mortgage, there are lenders out there who will consider you.

Get in touch if you’d like to speak to a specialist advisor for further support surrounding this.

How Gifted Deposits Can Help With Mortgage Deposits

A gifted deposit is when somebody, usually a family member, contributes a sum of money towards another’s deposit

Family Gifted Deposits

Getting together a deposit for a mortgage can be tough, and it’s not uncommon for first-time buyers to rely on the “bank of mum and dad” for a contribution. This is probably the best, and simplest, solution for parents looking to help their kids onto the property ladder, as it will open up more better rate options and reduce monthly repayments for the buyer.

The crucial thing to bear in mind here is that it is a gift and not a loan. The parent must be aware that they will not receive this money back, and that they will not have any claim on the property. Most lenders accept gifts from close family without question; but may be more reluctant when it comes to more distant family members. Deposit in the form of gifts from friends are not generally accepted by most lenders.

Builder Gifted Deposits

Mortgage deposit help exists in many shapes and forms, and many leading UK developers offer “Builder Gifts”, where (typically) new builds are sold with a discount incentive which can be used towards the buyer’s deposit.

Some will offer a “Deposit Match”, where they match the deposit that the buyer puts down (typically 5%), and the buyer will therefore take out a mortgage for the additional 90%.

The contracts will then be drawn up with the declared deposit contribution from the builder or developer, and the paperwork will be checked by a solicitor to confirm that the lender is aware of the structure of the deal and that an incentive has been offered.

Which Lenders Accept Builder Gifted Deposits?

Builder gifted deposits are not generally deemed acceptable by most lenders, as the price of a new build property can still be in question in a new development that has not had the time to settle, or indeed, sell. As a result, most lenders consider new build property higher risk, and thus require higher deposits.

There are however, several lenders that can consider them, in various scenarios. Make an enquiry and one of the experts will give you the right advice!

How Much Deposit Do I Need for a Buy-to-Let (BTL) property?

As we’ve already established, saving for a deposit for a mortgage can be tough, and if you’re investing in a buy to let there are additional things to consider. Lenders see buy to let mortgages as far higher risk than residential mortgages, and therefore they expect to be compensated for taking this increased risk on.

Firstly, you will be required to have a far larger deposit together for a BTL, with most lenders requiring 25%, however there are some lending with just 20% and a handful accept just 15%.

You can also expect to pay a higher interest rate than you would for a residential mortgage, but of course, the larger your deposit the better rates you’ll be offered. So, if you can afford to put down a deposit of over 25%, it often makes sense to do it.

Secondly, no matter how high a deposit you have, lenders will look at you more favourably if you can prove that you will be able to keep up with your repayments. They will want to know your expected rental income, so make sure that you have done your calculations and are confident that your earnings will comfortably cover your mortgage repayments plus any other expenses.

For a rough idea of what you may be able to borrow with many lenders, have a look at our buy to let mortgage calculator here.

Tips to Help You Save Up For a Mortgage Deposit

We’ve covered plenty of the usual loan options and government schemes which may be available to you, but how can you contribute personally to getting a deposit for a mortgage? Here are a few everyday money-saving tips you can start implementing right away. With some careful planning and a few cutbacks to day-to-day life, these easy fixes all help towards saving your deposit for a mortgage. You might be pleasantly surprised at how quickly it starts totting up:

  • Set Up a Standing Order- think about your monthly finances and set up a standing order for however much you can afford to save, and have it sent direct to a savings account on payday. You’ll be less tempted to touch it if it’s not in your bank account.
  • Plan Your Meals- take a lunchbox to work, make your own coffee before leaving the house, and do a big shop each week rather than popping to the convenience store every day. Takeaways and eating out gets very expensive if you do it regularly, so make it an occasional treat.
  • Switch Suppliers - energy companies and internet providers often lure you in with cheap monthly fees for the first 12-18 months, after which time rates rocket. Take the time to do a bit of research and see how much you could save simply by switching suppliers.
  • Audit Your Outgoings - do you really need the most expensive TV package? And do you make the most of your £60 a month gym membership? There are probably far cheaper alternatives available.
  • Visit the App Store - there are loads of free money-saving apps out there, from auto-saving bots which you can set up via Facebook, to those that round up each of your purchases to the nearest pound and save the extra.

Talk to an Expert on Help With Mortgage Deposits Today

If you like anything in this article or you’d like to know more, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 3rd December 2018
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of 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 info 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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