One of the most common questions for a home buyer, particularly a first-time buyer, is how much deposit is needed. Really this comes down to the value of the property, your personal circumstances and the type of mortgage you’re taking out. In this guide, we will cover the different types of mortgages and how much is required as an initial deposit for each type.
This is the most popular type of mortgage available, it is often also referred to as a capital and interest mortgage. This type of mortgage is the typical structure of how you would expect a mortgage to work, paid back in monthly instalments and the payments cover the money you have borrowed as well as interest on how much capital you have leftover. Once your mortgage term is up, you’ll have paid off the interest loan in full meaning you will only have the capital left to pay.
With an interest-only mortgage, you only repay the interest on the mortgage loan. These types of mortgages are sometimes more difficult to get approved for and at the end of the term you will have only paid the interest, so will still be owing the mortgaged amount of your property. Usually, interest-only mortgages offer lower monthly repayments, which is why they can be tempting to go for. But most homeowners with a mortgage have their end goal as owning their property out-right, it is less likely you will be able to do this with an interest-only mortgage.
With a fixed rate mortgage, your interest rate will stay the same for the duration of your initial loan period, which is usually between 1 and 10 years. After the initial loan period ends, your rate will be changed to the default standard variable rate of your lender. Fixed-rate mortgages are available on both repayment and interest-only mortgages and simply stops your terms from changing frequently.
An SVR is the default interest rate set individually by the lender. The rate is decided by the lender and they are free to modify it at any point. SVR mortgages are not offered out by lenders, however, once a mortgage deal has expired, for example, the fixed-term has ended, they are often automatically switched over to SVR mortgages, which usually means your monthly repayments will go up.
This is a variation of an SVR mortgage, where the lender offers a discounted rate over a certain period of time. It is a variable rate, however, so the amount you pay each month is subject to change if the lender changes their SVR.
Tracker mortgages are variable rate mortgages that are subject to change each month. These mortgage rates follow a particular interest rate that will decide what you pay each month. The benefit of this can vary, however, as the base rate the tracker mortgage is based off can go up or down, which means your interest rate can also go up or down.
Capped rate mortgages are variable; however, they have a cap on how high the interest rate can rise. The interest rates on capped rate mortgages are typically higher than tracker mortgages but they are not subject to change.
Flexible mortgages offer you the flexibility to be able to overpay or underpay on your monthly repayments. However, because of this, interest rates are usually higher. Some fixed-rate repayment mortgages will allow for overpayments, but not underpayments, but they usually have an annual cap. Flexible mortgages work well for seasonal workers for example who can pay large instalments at certain times of the year and lower ones when their income is less.
An offset mortgage is a type of flexible mortgage that allows you to pay off larger sums in order to pay less interest. With an offset mortgage, you can link a current or savings account with your lender, which is then used to make reductions on the amount of interest you are charged.
The amount needed for a deposit can change depending on what is offered by the lenders. However, lenders frequently ask for a deposit of at least 5% of a property’s value, though generally, they ask for 10% or 15% first. Deposits normally always work in brackets of 5%, so for example, if you have 8% of a property value to put down, you will still only qualify for the 5% deposit plan so you are better off saving up for 10% to move into that bracket.
Let’s take a look at an example of how much deposit you would need if you wanted to purchase a property with a value of £150,000:
The minimum deposit required in the UK is 5% of the property value, however, many mortgage lenders will not offer a 95% LTV mortgage and therefore it does limit your options in terms of competitive deals. Also putting down a lower deposit will mean you have to pay back your loan at a higher interest rate.
Although they are very rare, it is also possible to get a 100% mortgage with 0 deposit. The only form of 100% mortgages currently available are guarantor mortgages, which require a family member who already owns their own home to put their name on your mortgage. By doing this, they are putting their own property or savings at risk if you miss your mortgage repayments.
Loan to Value (LTV) is the lenders way of figuring out how much money they need to lend you to cover the cost of the property. The LTV will be the opposite of your deposit percentage. For example, if you put down a 10% deposit, your LTV will be 90%.
If you can save for a larger deposit then you do reap a number of benefits:
