Saving for a deposit can be a long and challenging process, and for many with high rent and living costs draining away a huge chunk of hard-earned cash every month, it can seem almost impossible for first-time buyers to get a foot onto the property ladder.
In the UK we’re fortunate enough to receive assistance from the government to help with a mortgage deposit when saving up to buy our first home. This article is going to cover these schemes in more detail and discuss what other low deposit mortgage options may be open to you, outside of government schemes. In this guide we’ll discuss:
What Is the Minimum Deposit Required for a Mortgage?
Nowadays, most lenders look at you more favourably if you have a larger deposit for your new home, because of the decreased risk, given that they are more likely to get their cash back if you don’t pay the mortgage. It can be very advantageous if you are in a position to be able save more deposit (typically having 20-25% means most lenders will consider you), because you will have access to far more lenders and are therefore are more likely to be eligible for better interest rates - saving you money in the long run.
If you can’t afford to scrape together a higher deposit, don’t panic. It’s still possible to take out a mortgage with as little as 5-10% saved, and this applies to both new build and resale properties. Before you make any decisions however, read on to discover what schemes are available to help you boost your savings and open you up to a better range of mortgage options.
What Government Mortgage Deposit Schemes are available?
Help to Buy
To help even more hard-working buyers a better chance of getting onto the ladder, the government has several Help to Buy schemes for those with low (minimum 5 percent) mortgage deposits saved. There are various ways you can benefit from government funded assistance when buying your first home.
Help to Buy: Equity Loan
The Help to Buy equity loan enables you to buy a home with as little as 5% deposit saved, and the help of a government-funded equity loan. Alongside your contribution, the government will provide a loan of up to 20% of the property’s value (40% in London).
It is available to both first time buyers and current homeowners looking to move, but the property must be a new build not exceeding the value of £600,000.
5% Deposit mortgages - government schemes explained
This means that a buyer only needs to get together a 5% mortgage deposit to be eligible for the scheme, and the government will give you their contribution on top.
So now you have a far more attractive down-payment of 25%, with a 75% mortgage making up the rest (55% in London). For example, if you have a 5% deposit saved and are looking to purchase a property valued at £200,000:
You are also eligible for Help to Buy if you have more than 5% saved. If you’re looking to maximise your contribution it is possible to have up to a 65% deposit together. However, if you have over 5%, under this scheme you must use a minimum of 10% Help to Buy equity loan and take out a minimum of 25% mortgage. So, for a property valued at £200,000 the breakdowns would be:
Government Equity Loan
£10,000 (5% min.)
£40,000 (20% max.)
£150,000 (75% max.)
£55,000 (25% min.)
£55,000 (25% min.)
£130,000 (65% max.)
£20,000 (10% min.)
£50,000 (25% min.)
It is worth noting that, if you take advantage of the Help to Buy equity loan, you are not able to sublet the property, nor can you enter into a part exchange deal in your old home (if applicable). You are not eligible for this scheme if you already own another property, so this is not suitable for buy to let (BTL) investments.
London Help to Buy
Due to the high cost of property prices in London, the Government has increased the upper limit of the Help to Buy equity loan scheme from 20% to 40% for those looking to buy within Greater London.
Again, you’ll need to contribute at least 5% of the property price as a deposit, and the Government will loan you up to 40% of the property value. You will then have to take out a maximum mortgage of 55% to cover the rest.
Help to Buy: ISA
If you’re saving towards your first home, the Help to Buy mortgage deposit ISA is a saving scheme where the government will boost your savings by 25%. So for every £200 you save, you get a £50 government bonus on top.
The minimum government bonus you can receive before withdrawing the funds is £400, so this means you will need to have saved at least £1,600 into the ISA before you can claim it. The maximum bonus you can receive this scheme is £3,000 (£12,000 in savings).
This scheme is open for each individual first time buyer rather than per household, so if you’re planning on buying a property with a partner you could potentially benefit from a government bonus of £6,000 towards your first home.
It’s a good, flexible scheme for new homeowners, but it does have one drawback in that you only receive your bonus money on completion of a purchase, rather than at exchange, where you’d typically put down a deposit - so bear this in mind.
Help to Buy: Shared Ownership
Shared Ownership is another scheme offering you government help with a mortgage deposit and is aimed at first time buyers and lower income households (£60,000 combined per year).
Shared Ownership gives you the opportunity to buy a share (usually between 25% - 75%) of a resale or new build home, while paying reduced rent on the remaining share. Later on, you have the option to buy bigger a share if you can afford to.
It’s worth noting that Shared Ownership properties are always leasehold, although you do have the right to purchase additional shares in the property. If your share reaches 100% of equity, then the property is no longer a shared ownership property.
You can either use your own savings to pay for your share of the property purchase price or take out a mortgage. Most lenders will require a minimum of 5% - 10% deposit, but there are a handful out there that are willing to offer 100% mortgages on shared ownership properties - so you may not have to save anything at all.
Help to Buy: Mortgage Guarantee
NOTE: The Help to Buy 2 scheme is not currently running. This was to allow borrowers to purchase any property on the open market at just 5% deposit and 95% mortgage, with the lender able to purchase a guarantee from the government to cover any losses, up to 20%. This was withdrawn in 2017.
Lifetime ISA (LISA)
The LISA is available to anyone aged 18 – 39, to buy a first property or to simply save for later life. You can save up to £4,000 a year, and the government will give you a 25% bonus on whatever you save. So if you were to save the full £4,000 every year, you would receive an additional £1,000 each time. Once you’ve held the LISA for over 12 months, you are able to withdraw the money and use it towards a deposit for a residential property under the value of £450,000.
LISA differs from the help to buy ISA, in that it can also be used to save for later life , with no deposits allowed after the age of 50, and only being accessed after the age of 60. Anything withdrawn before this date will suffer a charge of 25%, to reverse the government bonus.
The LISA is a tempting prospect because of the large sum you could receive in bonuses, meaning you have to put a lower amount of your own cash towards a deposit. Be aware though, if you withdraw any money from a LISA before the age of 60 and don’t use it towards buying your first home, you may be required to pay back a 25% penalty of your total savings. So make sure you can afford to save the cash you deposit into this account.
Right to Buy
The Right to Buy scheme helps eligible housing association and council tenants get help with a mortgage deposit by offering the property at a discounted rate.
The discount you receive depends on the length of tenancy, property type and its market value. Discount levels start at three years of eligible tenancy, increasing to a maximum of 70% of the property value.
There is however a maximum discount of £77,900 (£103,900 in London).
Unless you can afford to purchase the property with savings, you will need to apply for a mortgage and put down a deposit as normal.
However, many lenders will allow you to use your Right to Buy discount as your deposit, meaning you can potentially get a mortgage without any deposit contribution yourself. The upside is that you will be open to more competitive mortgage rates if you contribute to the deposit with your own cash.
Government Starter Homes Scheme
Aimed at first-time buyers aged 23 - 40, Starter Homes is a new government mortgage deposit scheme which can potentially give you a minimum 20% discount off a new-build home. The government states that this is possible via a “double whammy” of allowing developers to build on cheaper brownfield commercial land, and waiving taxes.
The maximum value of property offered under Starter Homes is £250,000 (£450,000 in London), and these properties may not be resold or rented at their original market value until at least 5 years post-sale. Completion of the first Starter Homes hit the market in 2018.
What Other Schemes Are There?
If you’re not eligible for a government-funded loan for a mortgage deposit, it is still possible to get on the housing ladder with a small (or sometimes even 0%) deposit saved. Some lenders will allow borrowing a deposit in personal loans, for example, if affordable.
In order to get access to the best rates however, consider whether you are able to take advantage of any of the following non-government backed deposit schemes.
Developer Gifted Deposits
Lots of building developers in the UK offer “builder gifts”, whereby new builds are sold with a discount as an incentive, which can then be used towards the buyer’s deposit. Others 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%.
Builder gifted deposits can be viewed with caution by lenders, and most will require evidence that the original asking price of the property matches the true market value. In addition, many lenders will want you to contribute to the gift out of your own pocket, which will not only prove your investment, but give you access to better rate mortgage options.
Certain lenders now offer specialist mortgages designed to help cash-strapped first-timers, with some of the most popular being “Lend a Hand” or “Family Springboard” schemes. The advisors we work with know which lenders offer these schemes, so it’s definitely worth having achat with them.
Both allow a first-time buyer’s relatives to leverage their savings to help them buy a home. Typically the buyer will need to contribute a minimum of 5%, and the family member will need to deposit 10% of the property purchase price into an interest bearing account, which they will be able to access after three years, providing all the mortgage repayments have been made on time.
Each lender has minimum total deposit requirements as well as different rates and requirements, but if you’re in a position where a family (or even friend) is willing to help contribute to your mortgage deposit it’s definitely worth looking into.
Boosting your deposit with schemes such as these will open you up to a greater range of lenders to choose from, and far more competitive interest rates. There are new schemes appearing all the time, so get in touch with a whole of market broker and find out the best deal to suit your situation.
A guarantor mortgage is when a friend or family member uses their money or home as a deposit or security on your behalf. To be an eligible, the guarantor will need to own their own property, or have enough equity in one to satisfy the lender.
They will also need good credit and proof they are able to cover your payments (alongside any of their own) if you default. Your guarantor will usually not own a share of the property you buy, and lenders will require a signed legal agreement detailing the contract terms.
While lenders can be cautious about who they accept as guarantors, these types of arrangements tend to be accepted by most lenders and many will allow you to take out a 100% mortgage - although as ever, you’re better off using some of your own savings as well to get the best rates.
Other Factors Impacting Eligibility
There are of course other factors that will affect your eligibility to take advantage of any deposit scheme.
Can I get government assistance for a buy to let?
As most schemes are aimed to help first time / low income buyers onto the ladder, if you’re looking to invest in a BTL or a second home you will not be entitled to government funding.
Additionally, if the property you’re looking to buy is a resale property this will limit your options, because most low deposit schemes are aimed at new build mortgages.
Will bad credit affect a government mortgage deposit scheme?
If you have a history of bad credit this may also impact eligibility. Depending on how recent and/or severe the bad credit issues were, you may not be entitled to help from the government, or lenders may require you to put down a deposit larger than 5%.
Below is a list of potential credit issues you may be faced with as a borrower if you’ve ever experienced any of these:
Adverse credit overview
Low credit score
County Court Judgements (CCJs)
Individual Voluntary Arrangements (IVAs)
Debt Management Plans (DMPs)
Under the Help to Buy scheme however you do have some more flexibility than you normally would when putting forward applications with historical credit issues, so don’t rule it out.
Can I get government help with a mortgage deposit if I’m self-employed?
Employment status is also a factor; self-employed individuals are seen as higher risk, and therefore fewer lenders are willing to invest in them. To get the most competitive rates, the self-employed should have a minimum of one year’s accounts as evidence of income (ideally 1 - 3 years’ worth). This will satisfy lenders that your income is steady and that you will be able to keep up with your mortgage repayments.
Can key workers benefit from government help with a mortgage deposit?
Absolutely. We often get approached by key workers, such as teachers, who want to know whether there are any schemes out there offering low or no deposit mortgages for those specifically within public service sectors.
In the past there were certain lenders that offered a key worker scheme, but unfortunately this is no longer available. The good news is that there are still some lenders that offer preferential rates for key workers and other professionals, as well as specific products that are not available to the general public, and the specialist advisors we work with know who they are.
Talk to a mortgage deposit scheme expert today
If you’d like further advice on what mortgage deposit loan schemes you’re eligible for, call Online Mortgage Advisor 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 no obligation or marks on your credit rating.
*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.
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes.
The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete's presence in the industry as the 'go-to' for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!
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