Knowing how much deposit you need for a mortgage is essential when you’re looking to buy a new house. In this article we are going to talk you through exactly what you need to know.
How much deposit do you need for a mortgage?
The amount of deposit you will need for a mortgage will depend greatly on your individual circumstances.
The minimum deposit requirement starts at 5% . This means you will need to provide 5% of the value of the property you wish to purchase. If the property was £200,000 then this would be a £10,000 deposit.
How does a mortgage deposit work?
A mortgage deposit is the money you pay towards the purchase of a house. This money is transferred to your solicitors when you buy the property, it is then combined with the money you are borrowing from your mortgage lender to pay for the house.
An example would be if you were purchasing for a price of £200,000 with a 10% deposit of £20,000. You would apply for a mortgage of £180,000 and you would then provide the £20,000 giving the total amount to £200,000.
What does loan to value mean?
Loan to value (LTV) is the percentage of the value of the property that is covered by your mortgage.
Here is an example of a 90% loan to value scenario:
Purchase Price: £200,000
Deposit: £20,000 (10% of purchase price)
Mortgage: £180,000 (90% of purchase price)
Because the mortgage is 90% of the property it is 90% loan to value.
The more deposit you can put down the lower your loan to value will be. A mortgage lender will take the loan to value into account when assessing an application and the lower the better.
When do you have to pay a mortgage deposit?
You will have to pay a 10% deposit for the purchase of a house on exchange of contracts. If you are putting down a deposit lower than 10% then your solicitors will deal with this accordingly and will allow you to exchange with a smaller deposit.
If you are putting down a bigger deposit than 10% then you will pay the initial 10% on exchange of contracts and the remaining deposit on completion.
Should I save for a bigger mortgage deposit?
It is not always possible for everyone but saving for a bigger deposit can have its benefits.
The main thing to consider is that the bigger deposit, the lower the interest rate you will likely receive on your mortgage.
Mortgage deposits are tiered as follows:
5%, 10%, 15%, 20%, 25% and 40%. These are the amounts you will need to reach in order to be eligible for the next set of interest rates.
What can you use for a mortgage deposit?
There are a number of different ways you might obtain your deposit. The most common deposits are:
Savings – You have put money aside over a period of time and managed to save enough money to put towards your house purchase.
Sale of existing house – If you are already a homeowner then selling your existing property and using the equity towards your deposit for the new house is very common practice.
Inheritance – Lenders will allow you to use money you have been left in inheritance as a mortgage deposit.
Gifted deposit – If you are gifted money from family or friends then this can be used as a deposit. Not every mortgage lender will allow this and the ones that do will usually require a signed gifted deposit form. This is something we can offer advice with to make sure we find a suitable mortgage lender.
Sale of an item – An example of this may be the sale of a car. Most lenders will be ok with this providing you can show proof of the sale and funds received.
For all of the above proof of where the deposit originated from will be required and this will be different depending on the mortgage lender and their criteria.
Do you have a 5% deposit?
If you have at least a 5% deposit and want to discuss your options, get in touch with us today and book a free no obligation appointment. Hopefully speak to you soon.
Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage. There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances.