What is a mortgage deposit?
Most people will buy a house using a mortgage.
But the mortgage lender won’t want to put up 100% of the money, that is far too risky. Instead they need you to contribute to the purchase price as well.
This contribution is expressed as a percentage so it can apply to properties of different values. So, if you are buying a property for £250,000, with a 10% deposit, you need to have £25,000 in savings to use as your contribution.
The vast majority of lenders will expect a deposit of at least 5-10%.
To summarise, the mortgage deposit is a lump sum of money that you have to pay to purchase a property with a mortgage.
How do mortgage deposits work?
The mortgage deposit is your contribution towards the purchase price and is paid upfront to your solicitor. The greater your deposit, the less you will need to borrow. A smaller mortgage means more affordable monthly payments.
Below we have two examples where the amount of deposit is different, but the house price is the same.
| 5% DEPOSIT | |
|---|---|
| Purchase price | £250,000 |
| 5% deposit | £12,500 |
| Mortgage needed | £237,500 |
| Loan to value | 95% |
| Repayments per month | £1,126.25 |
| Assumed repayment mortgage at 3% over 25 years | |
| 10% DEPOSIT | |
|---|---|
| Purchase price | £250,000 |
| 10% deposit | £25,000 |
| Mortgage needed | £225,000 |
| Loan to value | 90% |
| Repayments per month | £1,066.98 |
| Assumed repayment mortgage at 3% over 25 years | |
In the first example the cash deposit is 5% and the lender would provide the remaining 95% by way of a mortgage. As you can see the loan to value is 95%.
The phrase loan to value, or LTV, is used by every mortgage lender and gives simple guidance about the levels of deposit they are looking for. Our loan to value calculator is a useful way of seeing what deposit is required for different LTV amounts and you can learn more about loan to value here.
LTV Calculator
This simple calculator will quickly work out your loan to value (LTV) percentage. Just enter the property value, or purchase price, and the mortgage amount you need.
How loan to value affects the interest rates on offer
Lenders will always associate a maximum LTV with their mortgage products.
For example: 3 year fixed rate for mortgages upto 80% LTV.
In this example you would need to have at least a 20% deposit (80% LTV) to qualify. If you only had a 15% deposit then you would be eligible for a different interest rate product.
As the deposit goes up, and the LTV comes down, the interest rate becomes more attractive. This is because the lenders exposure to risk has decreased as you are putting in more of your own money.
Mortgage lenders all have their own level of risk that they are willing to accept when considering the loan to value percentage.
The LTV's are generally:
- 95%
- 90%
- 85%
- 70%
- 75%
- 60%
- 50%
- 40%
Benefits of a larger deposit
It may be tempting to opt for a low deposit mortgage, to get on the property ladder as soon as possible. However, you should take into consideration the advantages of saving a larger deposit.
Having a large deposit will always be a great benefit. It lowers the amount borrowed which means the monthly repayments are less and also can allow you to qualify for a wider range of interest rates (and sometimes lenders).
In terms of your eligibility for a mortgage it will be your employment status, credit profile and provable income that determines what the lender is happy to offer you.
However, lenders don't always approve the amount of mortgage you have asked for. They may feel that a lower amount is more affordable for you. When that happens and you still wish to purchase the property you will need to cover the shortfall left by the lower amount with an increase in your cash deposit.
As mentioned above, mortgage rates tend to be offered to certain bands of LTV. eg 90%, 75% etc. However, it could be worthwhile increasing your deposit and sneaking into the next band (just!).
So originally you have a 20% deposit, which is 80% LTV. If you can manage a 21% deposit then the LTV drops below the 80% band to 79% and could provide some savings. Your mortgage broker will be able to guide you and work out whether it provides a real benefit to you. Higher Lending Charges are affected in much the same way. The HLC is an upfront fee payable to the lender, generally when you have a high LTV.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Can my parents provide the deposit?
Yes, many parents will want to help their children in this way. Parents or close family members can provide some or all of the deposit, this is known as a 'gifted deposit'.
If this is a likely source of the deposit then you should mention it to your broker at the earliest opportunity as not all lenders are happy with gifted deposits.
The gifted deposit must be a gift without expectation of repayment (they can't have it back). The lender and your solicitor will need this to be in writing to confirm that all parties are agreeable.
An alternative to this could be a family offset mortgage or family deposit mortgage, which links family savings to your mortgage, rather than gifting the money.
You will find more useful information in our article: What is a gifted deposit?
Concessionary purchases
A concessionary purchase is where a property is sold for less than it’s true market value and a common scenario would involve a parent selling to a child or a landlord selling to their tenant.
A concessionary purchase mortgage allows the discounted purchase to take place, with the lender permitting the discount to be used as deposit or equity.
The overall aim is for the discount to be used as a deposit when calculating the loan to value percentage and overall eligibility.
Can I borrow the deposit?
Both your lender and solicitor will ask questions about your deposit and where the money has come from.
Any personal loans will show up on your credit search and will effectively increase the loan to value percentage, so few lenders will accept this way of obtaining a deposit.
(Do mortgage lenders do a final credit check before completion?)
How to provide proof of your deposit
Where a deposit is derived from savings, the evidence to prove this is fairly simple and bank statements will normally suffice. Most lenders will prefer to see the money accruing over a period of time, usually six to 12 months.
It is therefore a good idea to consolidate savings, at the earliest possible opportunity, into as few accounts as you can. This makes the paperwork that bit easier.
When does the deposit have to be paid?
When buying a house there are two stages where monies are requested as the deposit. Only send funds to your solicitors account once the bank details have been verified, this is an opportunity for a scammer to try and steal your money.
Exchange Deposit
You need to pay some of the deposit when contracts are exchanged. This is normally a few weeks before the completion date. A standard contract will state "The buyer is to pay or send a deposit of 10 per cent of the purchase price no later than the date of the contract".
So your solicitor will ask you for 10% of the price you are paying on the new property. eg. If the purchase price is £300,000 the exchange deposit will be £30,000. Occasionally you may agree a lower sum with your seller. This deposit is non-refundable should the purchase not go ahead.
Mortgage Deposit
The Mortgage Deposit is the deposit amount agreed by your lender on your mortgage application form and relates to your loan to value (LTV). The Exchange Deposit above forms part of this overall Mortgage Deposit.
Shortly before completion your solicitor will request any remaining deposit monies. This amount will be your Mortgage Deposit less your Exchange Deposit.
What’s the difference between a mortgage deposit and an exchange deposit?
What is an acceptable source for a deposit?
The UK has very strict money laundering regulations that all parties in a property transaction must adhere to. Essentially, this means that your money must be legitimate, not derived from illegal activities and that you can prove where it came from.
Sounds easy right?
Well for the most part it is easy but each lender has their own set of rules and mortgage borrowers will typically try to cobble together all the money they can, from all sorts of different places! Not all of these places and methods will be acceptable though.
Here we provide a brief overview of the sources that lenders are generally happy with. If you are unsure of anything please seek assistance from an independent mortgage broker.
Own savings
Unsurprisingly, this is the most common source for a deposit, along with personal investments. You will need to provide statements over a few months to show an increasing balance.
Equity
If you own a home already then you probably have built up some equity. This can be used as part or all of the deposit when you move home.
Sale of property
If you own property in addition to your main residence then the proceeds of any sale can be used as your deposit. Expect questions to be asked about mortgages and second charges plus how advanced the sale is.
Gift
For a gifted deposit the preferred source is from close family. This would be parents, grand-parents, uncles, aunts etc. Proof of their savings will be required and the monies must be a true gift and not a loan.
Inheritance
Most lenders will be happy but your eligibility for any inheritance monies, and the amounts, will need to be confirmed. If you are waiting to receive the money expect a few more questions to be asked.
Second property/portfolio
If you own other property and wish to utilise the equity then this is normally acceptable. The lender will want to see that the investment property self funds and that your finances are not going to be over-stretched.
Personal loans
Generally this is not permitted. It effectively raises your LTV and makes the mortgage more expensive and risky. Remember that personal loans and credit applications can be seen on your credit file.
Unknown sources
If the source is unknown because you are unable to provide any proof then this won't be acceptable. Cash is OK but you need to show evidence of receiving it and the origin.
Second properties
A second property could be:
The deposits requested by lenders for second properties and investment properties are a lot higher than for residential mortgages.
Typically 25% will be needed for those listed above. Where the loan is determined by the rent, the deposit may need to be higher if the yield is not good enough to qualify for the mortgage needed.
The source of your deposit for investment properties is a lot more flexible. It is certainly OK to raise the deposit by capital raising against another property you already own.
Buying at a property auction
The examples above are based on situations that involve a standard mortgage where purchase takes the conventional route. This could be a first time buyer mortgage, holiday let mortgage or buy to let.
If you intend to buy a property at an auction then the deposit process is slightly different.
BUYING WITH CASH
If you can afford to buy the property without needing any finance then the steps are that much simpler. On the day of the auction, the successful bidder needs to pay a 10% deposit (plus any fees) to the auction house. You must then complete the purchase within 28 days.
BUYING WITH FINANCE
It's difficult to finance an auction purchase with a standard mortgage, so many people use bridging finance which works well with the shorter timeframe.
On the day of the auction, the successful bidder will pay a 10% deposit to the auction house, plus their fees on top. You will still need to complete with 28 days. But you will also need to factor in the extra 15% needed so there is sufficient funds available.
A bridging loan lender will only normally lend up to 75% LTV, so you will need to have the 25% as a cash deposit. This would be paid in 2 stages with the first due on the day of the auction.
Remortgages
A remortgage is when you switch lenders but don't actually move house. A commonly asked question is: Do you need a deposit to remortgage?
Now you don't need a deposit per se, but there does have to be sufficient equity in your property.
FAQ
Frequently Asked Questions
Do I need a deposit to get a decision in principle?
No. However, you will need to know how much deposit you intend to put down.
Can you get your deposit back?
Your deposit, together with the mortgage, is used to purchase the property. Your deposit is effectively converted into equity.
What deposit is needed for a holiday let?
For a holiday let mortgage you will need to have a 25% deposit. But this can be funded from other properties.
Do you need a deposit for a Right to Buy?
Sometimes but there are quite a few lenders who will accept the discount as the deposit for a right to buy mortgage.
What is a the minimum deposit for first time buyers?
It should be possible to secure a mortgage that needs just a 5% cash deposit but no deposit options are also possible.
Who do you pay your deposit to?
Your deposit will be requested by your solicitor or conveyancer and must be paid to them only.
