**Have you got a big enough deposit?**

The days of deposit-less mortgages are long gone. Often, you’re going to need to get a substantial sum of cash together to get a property at a decent interest rate.

The deposit not only proves that you’re solvent and have financial discipline, but it also means the mortgage loan is less of a risk for the mortgage company. That’s because a mortgage is a secured loan (in other words, if you can’t repay, it gets your home) so by lending the money it’s taking a gamble on house prices.

If you’ve a 20% deposit, then house prices would need to drop by 20% before it wouldn’t be able to recoup the full amount of the loan if you couldn’t pay it back. So the bigger the deposit, the more it’s protected.

**How big a deposit will I need to get a mortgage?**

- To get a mortgage you usually need a minimum deposit of 5%. Yet to get a good mortgage interest rate, currently you’ll often need more than 20% of the home’s value as a deposit and more than 40% for the kick-butt market-leading deals.

The golden rule is quite simple. The bigger the deposit, the better the interest rate, the lower your monthly repayments, the cheaper the mortgage. The difference between a 5% and 10% deposit is huge; the next big jump’s at 20%, then 40%. So if you have any chance of pushing yourself up a band (or perhaps asking parents to help), do it.

The table on the previous page shows the effect of having a bigger deposit, as the rates get better the more you have (rates correct in January 2019).

It’s worth noting that back in 2012, it would have been impossible to get a mortgage with anything less than a 10% deposit. The big change to the market has been the growth in the number of 5% deposit mortgages, primarily due to the Government’s Help to Buy scheme (more on this later).

Yet while they’re available, the rates are still high compared to having a bigger deposit. So you should do your affordability maths carefully before plumping for one.

** LOAN TO VALUE**

In the best buy tables it says “LTV”, not deposit — what does that mean?

This is a figure lenders often use to indicate how big a deposit you need and you’ll see it in best buy tables. LTV stands for the loan-to-value ratio (LTV), which is the percentage of the property value you’re loaned as a mortgage. In others words, it’s the proportion that you’re borrowing.

To calculate this, simply subtract your deposit as a percent of the property value from 100%. So if you’ve a £20,000 deposit on a £100,000 home, that’s a 20% deposit, meaning you owe 80% — so the LTV is 80%. Just in case you’re struggling or scared of maths, here’s an easy table…

The reason it’s expressed this way is so the same term can be used for those getting a first mortgage and those who want to remortgage (changing your mortgage deal later on). Once you have a mortgage, you no longer have a deposit, so it becomes all about what proportion of the property’s value you’re borrowing.

It’s worth thinking about LTVs for a moment. They’re not just affected by the amount you put into a property, but also by house prices. This is crucial — by buying a property, you’re investing in an asset where the price moves.

*A practical example… let’s say you have a £10,000 deposit on a £100,000 house — that means you owe £90,000 at the start. That’s an LTV of 90%.*

*After a few years you’ll have paid a little off and now owe £85,000. If you came to remortgage (get a new deal) and the house’s value is the same, your LTV becomes 85%. *

*Yet if the house is now worth more, say £120,000, then your LTV is about 70% (as it’s £85,000 divided by £120,000 multiplied by 100). This means you’ll be likely to get a much better mortgage deal. Equally, if the house’s value had dropped to £80,000, you’d now owe more than it’s worth (which is called negative equity) and be unable to remortgage. *

**OK. I think I’ve got it. So for a 90% LTV mortgage I need a deposit of 10% of the property price?**

Big picture yes, correct, but it’s not quite that simple. You’ve made an offer on a property. The seller has accepted your offer. The mortgage company will now do a valuation of the property before it commits to lending you the money. The lender will base the LTV calculation on the *lower *of the purchase price or the valuation. So if the lender values the property at less than you’ve agreed to pay for it, it’ll only lend you 90% of the value it has placed on the property. This could mean you need a larger than expected deposit.

An example will help.

*You’re buying a house and you agreed a £200,000 price with the seller and have a £20,000 deposit. Yet the mortgage valuation says it’s only worth £190,000. For a 90% LTV mortgage the company will only give you a £171,000 loan (90% of £190,000), so now you’ll have to put up a £29,000 deposit to make it up to £200,000. You’ll have to find a further £9,000 to buy the property, which works out as a 14.5% deposit. *

If that happens to you (don’t panic, it doesn’t happen to everyone) it’s worth considering at