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How much deposit do I need as a First Time Buyer?

first time buyers mortgages

How Much Deposit Do I Need As A First Time Buyer?

Applying for a mortgage and buying a house is one of the biggest financial decisions you will make in your life, it can also be a daunting prospect.

With the average house price in England being just over £250,000 (according to the UK House Price Index at the time of writing) how do you work out how much deposit you will need to get a mortgage?

This can be the biggest dilemma of getting that mortgage. You need to work out how much of a deposit you will need for the property and loan type you want, and it takes time to save that deposit.

This article focuses on how much deposit you will need to put down on a mortgage as a first time buyer.

How do I work out how much deposit I need?

For starters a mortgage is simply a loan which is used to purchase a property. However, mortgage lending is based on Loan to Value (LTV). This is a risk calculation based on the amount you would like to borrow and the value of the property. The risk being how much they are lending to you.

It’s also the way in which you can work out how much deposit you will need. Based on the value of the property you would like to buy, the deposit size needed is a percentage of the value of the property. That percentage is the lump sum you would be expected to put down to secure that mortgage.

But what percentage of the property value will mortgage lenders accept?

Lenders will often offer a mortgage worth up to 95% of the property value as a maximum. This means you would only need to find 5% of the cost of the house as a minimum (100% mortgages are hard to come by and are usually reserved for exceptional circumstances).

Therefore, if the value of the property is £250,000 and a lender offered you a 95% LTV mortgage you would need a £12,500 deposit.

It is important to consider however, that different lump sums will have an impact on your choice of borrowers, mortgage size and interest rates.

Will having a bigger deposit help with mortgage rates and repayments?

Whilst it is possible to take out a mortgage with a 5% deposit it is not uncommon for mortgage applications to be turned down by lenders if the deposit is less than 10%. This is because mortgage loans under this threshold are considered to be high risk.

It’s also worth noting that those accepted for a 95% mortgage typically have a good credit rating, meaning those with a poor or low credit score may need to put down a larger deposit.

Essentially the bigger your deposit the lower the risk on the lender. The bigger the risk the more a lender will look to recoup in the form of fees and interest rates. Therefore, you will find that better interest rates are made available if you increase your deposit amount.  

If you look at the bigger picture, the larger the lump sum you can put down the lower your mortgage interest rate and the smaller your monthly repayments making it financially beneficial. It could save you more over the life of the loan.

What’s the average house Deposit in the UK?

The average deposit for first time buyers in the UK is around 15%.

This means that if the value of the property is again £250,000 your 15% deposit would be £37,500.

We know at Option Finance that is not always possible save a large deposit especially if you already renting.  

Are there other ways to increase a deposit?

The good news is that there are ways to help you increase your deposit. As there has been a decrease in the number of mortgage applications, several alternative options have been introduced by lenders.

Family members can help in ways such as:

  • Assisting with a Guarantor Mortgage – this allows you to ‘charge’ against their property providing they hold enough equity.
  • Taking out an equity release loan – allowing them to release equity tied up in their home to give to you.
  • Contributing to a Springboard Mortgage – using a portion of their savings as all or part of your deposit (the money borrowed is returned with interest as long as the mortgage is repaid on time).
  • Gifting deposits

The Government are also encouraging first time buyers into the market by offering incentives in the form of:

  • Help to buy equity loans – providing you raise 5% of the property value for a deposit they will provide up to an extra 20% as a loan.

If you can’t afford to buy 100% of a property, the Government also offers help to buy shared ownership in which you would buy a share of your home and pay rent on the remaining.

For more information about ways in which family members can help or to learn more about government initiatives, contact our helpful and knowledgeable advisors on 01332 470400

Other costs you need to consider when working out how much you have/need for a deposit.

It’s important to note that when considering mortgage applications, apart from the deposit amount you have, lenders take into account other variables such as:

  • Credit rating
  • Salary
  • Financial outgoings
  • Property type
  • Age

It’s also important to note that you will need more than just a deposit to cover the costs of buying a property.

Other fees related to buying a property include:

  • Mortgage fees – booking or arrangement fees and mortgage surveys
  • Legal fees
  • Stamp duty
  • Insurance
  • Home moving costs

How a mortgage advisor could help

Gaining advice from a mortgage advisor before applying for a mortgage so you can understand the deposit required for the mortgage best suited to you is paramount. We know that helpful and insightful advice can put your mind at ease at a time that could be stressful and daunting.

Mortgage advisors will also match lenders to their clients based on their personal circumstances. A lot of them are a whole of market brokerage, so will have access to high street lenders right through to specialist lenders.

Rather than trawling the high street and agonising over your choice, you could save time and potentially a large amount of money.

Expert mortgage advisors have helped many people in getting their first mortgage secured. Depending on your circumstances they will talk you through anything you’re unsure of and recommend the best mortgage for you from the wide range of mortgages on the market for house movers, such as the lowest fixed rate mortgages or base rate tracker mortgages.

Contact us at Online Mortgage Guru on 0345 3669799 or email us via info@theonlinemortgageguru.co.uk and we will put you in touch with a suitable specialist to handle your enquiry.  

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