The deposit is often one of the most talked-about factors when it comes to buying a property, and is especially relevant to first-time buyers, who often find that the years necessary to save up for the deposit are one of the most difficult parts of becoming a property owner. For many homebuyers, one of the biggest questions is always, how much deposit is needed?
When it comes to the amount of deposit that you will need for a property purchase, there are various circumstances to be taken into account. The type of property that you purchase, for example, shared ownership or buy to let property, along with whether or not you are a first-time buyer and the type of mortgage that you are applying for, should be taken into consideration when determining the size of deposit that you are going to need.
Getting a Deposit Free Mortgage:
In the past, there were various mortgages available that did not require you to put down any deposit at all. But right now, these types of mortgages are quite few and far between. Any 0% deposit mortgages that exist today tend to be guarantor mortgages, which work by requiring the homebuyer to get somebody else to use their own savings or property as security in order to cover the percentage of the deposit. There are various rules that apply to who can and cannot be a guarantor. In most cases, property buyers ask their parents or grandparents, and other relatives or friends may not be allowed. A guarantor mortgage can be quite a large risk, especially for the guarantor, who will be automatically liable to pay if you are unable to cover payments on the mortgage.
How to Work Out Deposit Needed for Mortgage:
The amount of deposit that you will need to get a mortgage is worked out as a percentage of the value of the home that you want to buy. The mortgage will then cover the amount that is left over. The smallest deposit that you can get is a 5% deposit, with a 95% mortgage. To work out how much deposit you’ll need at 5%, multiply the price of the property by 0.05. When applied to the average UK house price of £228,000 in 2018, the minimum deposit that you would need at 5% for a house at this price is £11.400.
What is the Recommended Deposit Required for Mortgage?
Since your mortgage is a loan, you will be liable to pay interest on it. And a lower interest rate means that your mortgage will be more manageable leaving you with more to spend on buying your home overall. Typically, the mortgages with the lowest interest rates are only available to those who have a larger deposit to put down. For example, a deposit of 20% may take longer to save up for compared to 5% or 10%, but in the long term, you will save money as it will typically get you a mortgage with a much lower interest rate in comparison. You will get access to better mortgage deals as you hit deposit milestones of 10%, 15%, 20% and so on. The most attractive mortgage options become available once you have a 20% deposit amount.
Various Schemes for Deposit of House Purchase:
There are various schemes to look into that can help you get your deposit together, which are often attractive to first-time buyers. For example, the Help to Buy scheme works differently to getting a regular mortgage and is only available on houses that are less than £600,000 in London and £400,000 in the rest of England. It only applies to new build properties and requires you to raise a minimum of 5% deposit. You can use a current Help to Buy ISA if you have one or open a Lifetime ISA if you did not already have a Help to Buy ISA as of the end of last year. When using the Help to Buy scheme, you will get a mortgage for 75% of the home, 20% is taken from an equity loan, and you cover 5% with your deposit. You will not pay any interest or fees on the equity loan for the first five years.
How Much Deposit for Buy to Let?
Purchasing a property for buy-to-let works differently to purchasing a residential property. You will be required to get a buy-to-let mortgage and will typically not have access to various schemes such as Help to Buy that are designed for first-time residential buyers. Typically, you will need a minimum of 15% deposit in the right circumstances, although most lenders will consider buy-to-let mortgages with a larger deposit of 30-40%. If you are considering buying a property to let with a mortgage, it’s important to get advice from the right specialist broker.
What is the Minimum Deposit Needed for Buy to Let?
The maximum amount that you can borrow with a buy-to-let mortgage will be linked to the amount that you can rent the property out for. Typically, lenders will prefer to see an average rental income that is much higher than monthly remortgage payments.
What Type of Deposit is Required for Buy to Let?
There are various types of the deposit that lenders will consider accepting for a buy-to-let mortgage. These include:
Capital Raised from Another Property:
Some professional landlords may consider structuring their businesses as a buy to let limited company, which can be the most tax-efficient option for a landlord with multiple properties. This also allows the landlord to use one or more of their existing properties as a deposit when making an application for a new buy-to-let mortgage. Lenders may have various criteria in terms of the maximum number of mortgage properties permitted, but most are willing to lend to a limited company.
In some circumstances, such as when a landlord needs to move quickly to secure finance for a property bought at auction, a bridging loan may be accepted. The amount available to borrow will normally be based on the estimated value of the property once it is completely renovated.
House of Multiple Occupants (HMO):
Typically, lenders will ask landlords for larger deposits on HMO properties, however, a lower deposit – sometimes as low as 15% – may be accepted in the right circumstances.
Some lenders may also accept buy to let property mortgages with gift or concessionary deposits. These come in two different types, which are gifts from either immediate family members or from people who are not close relatives.
Do You Need a Deposit for Second Home?
If you want to buy a second home, a deposit may or may not be needed depending on your current circumstances. In some cases, for example, you may be able to remortgage your current property in order to raise the funds to purchase a second home. Or, if you are selling your current property in order to buy a second home, you will typically not need a deposit since you can use the funds raised from the sale of the first property to purchase the second one.
However, if you are currently the owner of a property that you have no plans to sell when buying a second home with a mortgage, you will typically need to raise a deposit. The good news is that most lenders will value you as a potential customer when you are a current homeowner, as long as you meet their criteria and can prove that you can afford two mortgages at once. Due to the higher risks that come with having more than one mortgage at once, second home mortgage deposits tend to be a little higher compared to what you would be expected to put down when purchasing a first property. Some lenders will offer a more generous deal depending on how much equity you have in your current property. If you own your current property outright, you can generally access better mortgage deals with lower deposits accepted since you will only be making repayments on one mortgage rather than two separate ones.
Deposit Second Home
There are various reasons why you may decide to take out a second mortgage. Some common reasons include purchasing a home to use for holidays in the UK, purchasing a work residence in order to avoid commuting to a place of work that is located some distance away from your main home, purchasing a property on behalf of a relative, or purchasing a new property after the breakdown of a relationship or marriage if you are staying on the old mortgage.
The deposit that you will need to buy a property will depend on a number of factors including whether or not you are already a homeowner and your purpose for purchasing the property. The lowest deposit amount that is typically available is 5%, but a deposit of 20% tends to unlock better deals and much lower interest rates regardless of your situation. Check out the properties we have for sale in London and work out the deposit you will need to make the purchase.