Not having a big enough deposit is often considered to be the number one stumbling block for those looking to get onto the property ladder. The deposit obstacle has grown so large in many people's minds it causes them to stick their heads in the sand and forget about the whole sorry affair altogether. This, obviously, isn’t the best course of action if you truly want to own your own home.
Knowing how much deposit you need is the first hurdle to overcome. Once you have a relatively concrete figure, you can begin to work towards it. Not knowing solves nothing.
So, with all this in mind, we’re going to answer the biggest question in home buying: How much deposit do I need to get a mortgage?
A game of percentages
Expressing a deposit amount in terms of pounds and pence is an impossible task, as everyone’s circumstances will be different. For a start, one person’s property purchase may cost X, while the next person’s new home may cost Y. That’s why mortgages are calculated in percentage terms, and thankfully they are not as difficult to work out as you might think.
Generally speaking, the lowest deposit you can work with at the time of writing is 5%. There are a couple of big High Street lenders out there currently offering 0% mortgages, but they are best avoided if you possibly can.
Most mortgages with an LTV (more on this abbreviation in a bit) of 100% require a guarantor, which puts their savings or property at risk. Therefore, you are endangering someone else's financial well being if you default...and that someone will generally be a close relative, such as a parent or grandparent, as most lenders will not accept anyone else as a guarantor.
Making the calculation
Working out your property deposit percentage couldn’t be simpler.
In order to calculate a 5% deposit, for example, you’d need to take the price of the property you’d like to buy and multiply that by 0.05 to get the amount of deposit you’d need to secure a mortgage on that home. Working out other percentages are just as simple: 10% would need the property price to multiplied by 0.1, 20% by 0.2, and so on.
So, for a £180,000 property, a 5% deposit would be £9,000 (180,000 x 0.05 = 9,000).
Naturally, if you are just curious at the moment and don’t have a specific property in mind, you’ll have no idea what figure you need to multiply. In this instance, head over to a property portal like Zoopla and check out the averages for the area you wish to move to. This will, at least, give you a ballpark figure to work with. Oh, and don’t forget to adjust the property type to get a better representation, otherwise you might have much bigger homes skewing the average.
Is 5% a recommendation?
While you can indeed get yourself a mortgage with as little as 5% down, we’re not automatically recommending that you do so. Again, everyone’s circumstances will be different, so you need to evaluate your requirements to get the correct answer for your own situation.
However, the advice is very straightforward: put down as much deposit as you can realistically afford.
While many will see a low deposit threshold and think, “free money!”, it really is anything but. Lower deposit percentages are seen as higher risk loans by banks and building societies, so they cover this risk accordingly. This is factored into the amount of interest you’re expected to repay over the duration of the loan.
So, the bigger the deposit, the lower the interest.
Other reasons why bigger is always better
Saving for a bigger deposit will have other benefits to go alongside better interest rates. Obviously, the more you put down initially, the less you’ll have to pay back, so your monthly repayments will be lower, for starters.
Having a bigger deposit also makes you more attractive to lenders, so you’ll have more choice as to who you decide to go with. The added attractiveness also mean that you’ll be improving your chances of being accepted in the first place, which is obviously highly beneficial.
Finally, the greater the deposit, the less risk there is for you, the homeowner. If you only put in a tiny amount at the start and the market takes a turn for the worst, which does happen from time to time, you could find yourself in negative equity.
This means that the money you owe to your lender exceeds the value of the property and it can result in you being stuck with the property and the mortgage...regardless of whether you want to sell or switch lenders.
How to unlock savings
There’s a secret to lowering your interest rate that many home buyers (and even existing homeowners) don’t know about: the 5% basis.
While this may sound vague, it’s easy to work out once you’re aware of it.
Basically, the overriding majority of lenders operate on what is known as a 5% basis. In short, this means that their loans (i.e. mortgages) are separated into 5% buckets - so, someone with a 5% deposit gets one rate, those with 10% get another, 15% lower still...and on and on.
Why does this matter? Well, if you’re sitting with a 9% deposit, you’ll be priced into the 5% market. Saving up a further 2% to put yourself firmly into the next bracket will open up way more mortgage products to choose from, and it will save you money over the long term.
Same applies if you’re sitting at 18% or 14%...saving a bit more to hit the next 5% level is well worth the effort.
What’s all this LTV business about? I’m seeing it everywhere
LTV stands for Loan To Value, and it’s the common way for lenders to work out how much you’d like to borrow in relation to the property you’d like to buy. This is also always expressed as a percentage.
Essentially, your LTV will be the opposite of your deposit, so it’s not difficult to work out. If you have a 5% deposit, your LTV will be 95%. A 20% deposit gives you an LTV of 80%.
If you’d like to dig a little bit deeper into LTV, check out this post: What Is Loan To Value And Why Does It Matter?
Saving for a deposit
Finding out the amount of cash you need to get a mortgage is, naturally, only the first step towards buying a property. The next big one is actually putting together enough savings to make it happen.
While it’s by no means an easy task, it’s not impossible either. Here at Petty’s, we’ve helped people in all sorts of situations find their dream home, so you most definitely can do it if you set your mind to it.
Our guide to saving for a property deposit might be useful, so go and give it a read to see if there are any options you may have overlooked up until now. Things like Help to Buy or shared ownership may suit you, or there may be another method or idea you get from the post. Be sure to check it out...and good luck!
Now you know some of the terminology and calculations associated with deposits, lenders, and mortgages, we hope you’re better armed to make sound decisions over your future property prospects.
However, if you need any further help, or if you’ve already started looking at homes in East London and West Essex, give us a call. We have been operating locally for well over a century, so we know the area like no other agent. Speak to a member of our friendly team today to find out how we can help you make your property dreams come true.