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The Ultimate Guide to House Deposits

April 21st 2022

Saving for a house

Looking to buy a house? You’ll need to put some money down upfront.

It doesn’t matter whether you’re a first-time buyer, a previous homeowner, or a seasoned buyer—if you’re buying a home using a mortgage, you’ll probably need to put down a deposit.

Here’s the problem; saving up enough deposit to buy a home is one of the main struggles most UK buyers face. With the average UK property price at £278,000, even a meager 5% deposit equates to a staggering £13,900. 

When you factor in property taxes and other origination fees, the price could shoot up to £15,000 or more. Putting down such a huge sum as a deposit is unachievable for many. 

Which brings up the question: Is it possible to purchase property with a 0% deposit? 

This comprehensive guide will cover everything you need to know about mortgage deposits, including why saving up a bigger deposit is recommended. But before we delve into that, let us get down to the basics. 

What Is a Mortgage Deposit?

When buying a property, you’ll typically need to pay a specified amount of cash upfront—this is your mortgage deposit. The more the deposit you put down, the less you need to borrow, and the better the mortgage deals you get. 

What Is a Holding Deposit?

You may sometimes be required to pay a holding deposit on your new home. This is different from the mortgage deposit you paid upfront. 

A holding deposit shows the seller you’re serious about purchasing their home and prevents them from selling the property to someone else. It’s up to the seller and their solicitor to set the holding deposit amount, but it’s typically between £500 – £1,000.

The seller and their solicitor decide on the holding deposit amount, which is affordable and enough to discourage the buyer from pulling out before the exchange. 

How Much Deposit Do You Need to Buy a Home?

Before you embark on your house-hunting journey, you’ll need to make sure you’ve saved enough for the deposit. 

But exactly how much do you need to save?

Generally, you’ll need to save at least 5% of the property’s purchase price. For example, if you need a house costing £400,000, you’ll need to save at least £20,000 for the deposit. 

Most lenders will accept a 5% down payment, which is becoming more common since the government introduced the mortgage guarantee scheme in 2021. While it’s set to last until December 2022, this scheme protects lenders if borrowers default on payments.

The mortgage guarantee scheme aims to help people buy properties in the current environment and applies to all properties worth less than £600,000. It can help you secure a mortgage that’s worth 91 – 95% of your preferred property value. 

How Much Do You Need to Save?

To calculate the amount you need to save for your mortgage deposit, there are two things you need to consider: 

  • Typical property prices
  • Monthly repayment costs

Typical Property Prices in the Neighbourhood

You can get a rough idea of the local house prices by visiting property listings sites like Rightmove or Zoopla. You could also ask local real estate agents about how much the properties have sold in the neighbourhood. 

The figures you get from property websites are asking prices, so they might be higher than what exactly the property is worth. 

How Much Can You Afford in Monthly Payments

Mortgage rates are constantly changing, and the rate you get might not be the lowest in the market. Plus, you’ll need to factor in service costs, early repayment charges (ERCs), and the loan term. 

You could use an online calculator to determine how much the mortgage will cost you each month. If the repayments for a low-deposit mortgage are high, you’ll need to save more to pay bigger deposits or look for alternative financing options. 

Still, we recommend saving more so you can pay a bigger mortgage deposit. Here’s why. 

Reasons to Save for a Larger House Deposit

While a 5% deposit can, in most cases, get you your dream home, there are plenty of reasons to go big on your house deposit. These include:

1. Cheaper Monthly Repayments

This one is a no-brainer; the bigger the deposit, the cheaper the monthly payments on your mortgage. A low deposit might seem friendlier to many, but it can prove expensive and difficult to maintain down the line.

2. Better Mortgage Deals

The bigger the amount you’re willing to put down, the more competitive the mortgage deals with lower interest rates. This is because putting more money towards purchasing property lowers your risk of defaulting. 

3. Improved Chance of Being Approved

Lenders usually conduct affordability checks before approving a mortgage to determine whether you can manage the monthly repayments. You’ll likely fail these checks if you put down only a small amount as a deposit. 

A larger deposit, on the other hand, increases your chances of being approved as it shows you’re financially stable. 

Can You Get a Mortgage with a 0% Deposit?

The short answer is Yes.

You can get a mortgage without a deposit. However, this means your house will be financed 100% by a mortgage, which carries a high level of risk. 

Plus, mortgages requiring a 0% deposit are rare to find. In fact, the only 0% mortgages that exist are guarantor mortgages. These mortgages work by having someone else, like a parent, use their savings or property to cover the deposit percentage. 

Lenders usually have tight rules around who can and cannot become a guarantor. For instance, friends and distant relatives are often not allowed. 

Guarantor mortgages pose a risk to the guarantor. For example, if the borrower defaults on the loan, the guarantor is liable to pay instead. These loans are also risky for borrowers. For instance, if the house prices fall, this could leave you with negative equity. 

On top of that, the interest rates for 0% deposit mortgages are incredibly high, and the repayment is pretty expensive. For this reason, taking a mortgage of at least 5% deposit is recommended, even if it will take you a little longer to buy the property. 

Wrapping Up

If you’re buying a home using a mortgage, you’ll probably need to put down a deposit. 

While most lenders will accept a 5% deposit, opting for a bigger mortgage deposit is recommended to enjoy better mortgage deals and cheaper monthly repayments. Putting down a bigger deposit also increases your chances of being approved for a mortgage.

Those unable to raise a 5% deposit may opt for guarantor mortgages. However, these loans are expensive and risky for both the guarantor and the borrower. 

For more information on mortgage deposits and where to get the best mortgage solutions, contact us or arrange an in-house appointment by filling out an easy online form. With over 40 years of experience, we are best placed to offer you sound financial advice. 

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