If you’re buying a property, you’ll need a deposit. They’re key to the mortgage process and there’s not much chance you’ll be approved without one.
This is why it’s so critical for a home buyer to understand everything they can about deposits - in this way, you can start planning your saving strategy and ultimately understand how much you need.
What is a House Deposit?
Fundamentally, a deposit is a sum you initially pay when you mortgage a property. It doesn’t matter what kind of property or how big it is, you’ll always need a deposit if you get a mortgage.
So why do we need it? Generally, it's to demonstrate to lenders that you have the finances to purchase the home whilst also ensuring you have a stake in the property since you’re money is tied up alongside the lender’s.
The deposit you pay off at the start of the process becomes your ‘equity’ - just another word for stake - which grows as you pay off your mortgage. The thing to remember is, while you’ll generally need to put down a minimum of 5 - 10%, there’s no upper limit on how much you can put down initially. The bigger the deposit at the start, the lower your loan-to-value ratio, the less you have to borrow on the mortgage and the better rates you’ll get.
This is why saving for a house deposit is often seen as such an important part of our daily finances - the more we can put down early, the better off we’ll be.
What is a Loan-to-Value (LTV) ratio?
Whenever the subject of house deposits or mortgages is raised, you’ll probably hear the term ‘loan-to-value ratio.’
It’s used by lenders to determine the risk a potential buyer poses in terms of paying off the mortgage.
Buyers with a low LTV ratio (typically those paying with a higher initial deposit) are generally considered low risk and, thus, seen much more favourably by lenders.
Your LTV ratio is directly determined by the price of the property and the size of the deposit you have.
It’s worked out by dividing how much you’re borrowing - with your deposit included - by the overall price of the property and then multiplying the sum by 100.
While you probably won’t need to know your exact LTV, it’s good to remember that a low LTV ratio is generally considered better by mortgage lenders.
How Much is a House Deposit?
The most common question we hear around this topic is ‘how much is a house deposit?’. It’s a fair question - we always hear about house deposits being expensive and difficult to save for, but how much do we actually need?
The answer is, like most things property related, it depends.
In most cases, the minimum requirement for the deposit depends on the mortgage product you opt for. The catch is that many of the different mortgage options available to you also depend on the size of the deposit you have.
The bigger the deposit, the better the options you have.
In a traditional property purchase, you’ll probably need a deposit of at least 5 to 10% of the purchase price - these are the most common and often referred to as 90 - 95% LTV mortgages. The downside to these is that they generally have higher interest rates.
As the LTV drops - and the required deposit size increases - the rates improve, with the best rates typically landing around 60% LTV, meaning you’d need 40% of the property price as a deposit.
The scenario changes again if you’re getting a mortgage through a specialist lender - the amount of deposit they’ll require will depend on the individual mortgage product you’re going for.
This is why an affordable home ownership scheme such as shared ownership is so beneficial for aspiring homebuyers. It drastically reduces the amount you require for a deposit, as you’re taking a mortgage on a share rather than the full market price.
At Platform, the majority of our developments require a 5% deposit on the share that you’re purchasing.
How Can You Pay a Mortgage Deposit?
While most people pay their deposit with either personal savings or money from investments, there are several different ways you can pay including the following:
Personal Savings or Investments: Most UK lenders prefer buyers to use personal savings or investments. To utilise this source, you’ll generally need to show proof of an account building these funds up over three to six months.
Gifts: If a family member is providing your deposit, you’ll generally be accepted by most lenders. To prove this deposit, the donor must lay out in writing that the deposit is a gift and doesn’t translate to any ownership or interest in the property. If the donor isn’t a relative but a friend or acquaintance, you’ll find it much more difficult to be approved for a mortgage.
Property Sale: As you’d expect, the majority of lenders accept any funds that come from a property sale, provided the funds are all under your charge. You may also pay for a deposit by selling other assets but there are several anti-money laundering rules that you’ll have to follow.
Inheritance: Provided the inheritance funds have been released, the majority of mortgage lenders will accept your application. You’ll need written confirmation from an employer or solicitor alongside actual evidence of the funds to proceed in this way.
Overseas Funds: As long as you have an established bank account overseas, most lenders will be happy to use this source as a method of paying for a house deposit. Much like using your personal savings, you’ll need account statements from the last three to six months.
Finally, the majority of lenders won’t accept a loan or cash as a way of paying a house deposit, typically because they bring with them further risk.
