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