What's the minimum deposit for a mortgage?

What's the minimum deposit for a mortgage?

By Nic Hopkirk

Ready to step onto the property ladder? From 95% mortgages to government schemes designed to give you a leg-up, here's what's available to help you on your way.

Saving for a deposit is the biggest step you’ll ever take towards owning your own home and it can feel like a herculean task. 

Saving a bigger deposit will open up more mortgage options for you, giving you greater choice when it comes to lower interest rates and lower repayment costs.

A bigger deposit will also mean more of a chance of your mortgage being accepted.

For a £300,000 property, your deposit scenario would be:

  • 5% - £15,000
  • 10% - £30,000
  • 15% - £45,000

Ideally, it’s good to save a minimum of 10% of the value of the home you want to buy. If you can get to 15%, all the better.

That said, there are mortgages available to help first-time buyers onto the property ladder with 5% deposits.

And the government also offers interest-free loans through its Help to Buy scheme. Do bear in mind though, that these loans must be paid back, with interest. So it may be better to save up your own deposit first before you make the leap.

How do I get started saving for a deposit?

The easiest way to start saving for your new home is to automate your savings. Work out how much you want to spend, then calculate how much you need to save each month.

Scout around for the best savings accounts available, offering the highest rates of interest. Sites like Money.co.uk are a good place to start.

The Lifetime ISA scheme offered by the government lets you put in up to £4,000 a year and the government will then chip in up to £1,000 a year. You need to be between 18 and 39 to apply but you can keep stashing away cash until you’re 50.

Set up automatic transfers from your current account into your savings account as soon as you get paid, that way the money’s gone and you can’t spend it.

Can you buy a house with a 5% deposit?

Yes you can. But there are pros and cons to having the minimum you can get away with.

Launched in April 2021, government-backed 95% mortgages are now available for buyers until December 31, 2022 and work for homes costing up to £600,000.

How much can I borrow with a 5% mortgage deposit?

How much you can borrow depends on how much you earn, as banks will lend up to 4.5 times your annual salary.

So, to buy a home worth £300,000 with a deposit of just 5% (£15,000), you’d need to earn £63,300 a year to borrow the remaining £285,000.

The downsides to borrowing with a 5% mortgage

Saving for a 10% deposit will give you more choice with mortgages, giving you better access to lower interest rates.

Lenders typically charge higher interest rates to people with smaller deposits.

Saving for a bigger deposit could also make it easier for you to pass a mortgage affordability test as your monthly repayments will be lower.

Mortgage lenders look at how much salary you have coming in, alongside your typical outgoings when deciding if you can afford a loan. The lower your monthly repayments are, the more likely you’ll be to pass the test.

Can you get a mortgage with a 10% deposit?

Most banks like to see that you have a 10% deposit for the property you’re buying.

Mortgages are often described in terms of ‘loan-to-value’ or LTV. So, if you have a 10% deposit for the home you want, the value of the loan you’ll take out will be 90%. 

Banks tend to have bands where mortgage rates become cheaper. That’s because the larger the deposit you have, the lower risk you are to the bank if your home loses its value.

Generally speaking:

  • Those with a 10% deposit (90% LTV) will be charged the most
  • Those with 25% (75% LTV) will be charged less, and
  • Those with 40% (60% LTV) will be charged the least

Can I get a 100% mortgage?

Before the financial crash in 2007, it was easier to get a 100% mortgage. These days, very few lenders offer them.

A 100% mortgage is where you borrow the full value of your home with no cash deposit.

In most cases they’re only available through guarantor mortgages, which means you’ll need a guarantor (usually a parent) who’ll be responsible for paying the mortgage if ever you’re unable to.

These types of mortgages carry a much bigger risk if house prices fall, as you could find yourself in negative equity, meaning the value of your home is worth less than the mortgage you’re paying for it.

Should I borrow money from my family for a bigger deposit?

The bank of mum and dad is now the UK’s 9th biggest mortgage lender, according to the Mortgage Advice Bureau.

Borrowing an extra 5% from your family to give you a 10% deposit certainly makes sense for you as a buyer, as it will enable you to qualify for a lower interest rate on your mortgage.

It may also make it easier for you to get a mortgage if borrowing slightly less puts on you the right side of a lenders’ affordability checks.

But if you go down this route, it's important to know where you stand. For example, is the money a gift or a loan, and, if it's the latter, is there a date when it needs to be repaid?

Tapping into mum and dad’s retirement savings may help you to get on to the property ladder quicker, but it can create family tensions if they need the money back and you can't repay them.

Two friends sharing a box of chips by the seaside on a windy day

What is shared ownership?

Shared Ownership is a government scheme that offers you the chance to buy a share of a property from a housing association, a non-profit-making body that provides homes.

Because you only own a part of the property, you can buy it with a smaller deposit and mortgage. A smaller mortgage means smaller repayments but you’ll also need to pay:

  • rent on the share of the property you do not yet own
  • monthly service charges
  • ground rent

Find out more about Shared Ownership.

How does Help to Buy work?

With Help to Buy, the government loans you up to 20% of the property value (rising to 40% in London). You pay a 5% deposit and then take out a mortgage to cover the rest.

The equity loan is interest-free for the first 5 years. After that, you’ll start paying interest at 1.75% in year 6 and more each year after. The amount rises each year in line with inflation.

You have 25 years to repay the loan unless you sell up before then. If you do, that’s when you’ll need to repay it. To avoid paying interest on the loan, it’s best to pay it off within the first 5 years. 

When weighing up your decision, it’s important to remember that the equity loan amount changes in line with the value of the home. 

So, for example, if the property value has risen by 10% at the point you sell it or after 25 years (whichever comes first), you’ll need to pay back more money to settle the loan. If the value falls, you’ll pay back less.

Find out more about Help to Buy.