Figuring out how much you need to save as a deposit is a common challenge when starting the journey to buying your first home, or moving up the property ladder. So, we’ve put together this guide to help demystify deposit requirements and how to buy a home with a low deposit. Let’s dive in!

How much of a deposit should you save?

In the UK, lenders typically require a minimum deposit of 5% to 10% of the property’s purchase price. For example, if you’re buying a £200,000 home, a 5% deposit would be £10,000, and a 10% deposit would be £20,000.

However, saving more than the minimum could bring significant advantages. A larger deposit often means you’re borrowing less in comparison to the property’s value (known as a lower Loan-to-Value, or LTV ratio). This could help you unlock more competitive mortgage deals, lower interest rates, and give you access to a wider range of lenders. Over the lifetime of a mortgage, even a slightly better interest rate could help save you thousands of pounds in interest.

You could unlock better mortgage interest rates by hitting specific Loan-to-Value (LTV) “bands”, which usually shift in 5% increments. This means if you put down an 8% deposit (92% LTV), you’ll likely get the same interest rate as a 5% deposit (95% LTV). However, if your deposit pushes you into the next band, like putting down 10% to reach 90% LTV, you’ll typically secure a lower interest rate.

What alternative options are available?

If saving the traditional 5-10% deposit feels out of reach, don’t worry – there are also several alternative routes to homeownership that don’t require as much upfront cash.

Low or no deposit mortgages (e.g., 95% or 100% LTV deals)

You might be able to find new mortgage deals that require a much smaller deposit, or even no deposit at all. These are typically designed for specific groups, like first-time buyers in certain areas, or require family support in a different way than a traditional guarantor. They’re often backed by a lender’s commitment to help more people get on the property ladder.

  • Pros: Can allow you to buy a home with minimal or no personal savings upfront, potentially getting you on the property ladder sooner.
  • Cons: These deals are often more limited in availability, come with stricter eligibility criteria, and might have slightly higher interest rates compared to those requiring a larger deposit. With very little or no deposit, there’s also a higher risk of negative equity if property values fall, meaning your home could be worth less than your mortgage. It’s always important to understand all terms and conditions.

Guarantor mortgages

A guarantor mortgage allows a family member (often a parent) to use their own property or savings as security against your mortgage. This can help you get a mortgage with a smaller or even no deposit, as the lender has extra reassurance that the loan will be repaid. Your guarantor is essentially promising to cover your mortgage payments if you can’t.

  • Pros: Can allow you to buy a home sooner with less personal savings.
  • Cons: Puts your guarantor’s assets at risk. It’s a significant commitment for them, so it’s not an arrangement to go into lightly

Shared ownership

Shared ownership schemes allow you to buy a share of a property (typically between 25% and 75%) from a housing association and pay rent on the remaining share. This means you need a much smaller deposit, as it’s only for the share you’re buying.

  • Pros: Requires a significantly lower deposit and offers a stepping stone onto the property ladder. You can often buy more shares over time (called ‘staircasing’) until you own the whole property.
  • Cons: You’ll pay both mortgage repayments and rent. There may also be service charges. Not all properties are available through shared ownership.

For next-time buyers: using your equity

If you already own a home, your deposit for your next property can come from the equity you’ve built up in your current one. Equity is simply the portion of your home that you own outright, calculated as your home’s current market value minus the outstanding mortgage balance you owe.

For example, if your home is worth £300,000 and you have £150,000 left on your mortgage, you have £150,000 in equity. When you sell your current home, after paying off your existing mortgage and covering selling costs (like estate agent and solicitor fees), the money left over is your equity, which can then be used as the deposit for your next purchase.

Considerations for next-time buyers:

  • Market fluctuations: Your equity value can change with house prices. While no one can predict the peak of the market, getting regular valuations can help you stay on top of your home’s current value and any changes.
  • Selling costs: Factor in estate agent fees, solicitor fees, and potentially Stamp Duty for your new purchase. Check out our guide on extra home costs.

Understanding deposit requirements and the options available if you can’t save the minimum is a powerful step towards homeownership. The key thing to remember? Whether you’re just starting your savings journey, considering alternatives, or looking to make the most of your existing equity, there’s a path for you.

 

Your home may be repossessed if you do not keep up repayments on your mortgage.

You may have to pay an early repayment charge to your existing lender if you remortgage.