One of the biggest questions first-time buyers have when purchasing a new home is how much deposit is needed. Lots of people make a big deal out of deposits, while they can also be something of an unknown quantity. Read on if you want to know how much deposit for a house is really needed, as well as some other things to keep in mind about this aspect of buying a home.
How much deposit do you need for a house?
HOW MUCH DEPOSIT DO I NEED FOR A HOUSE?
Can you believe it? There was once a time when it was possible to buy a house with a 0% deposit. This is much more difficult at the moment, with most mortgage providers requiring some form of deposit in order to secure a mortgage. Typically, the largest mortgage you can get is for 95% of the purchase price of a property. This means normally, the smallest deposit you require will be 5% of the value of your new home.
The average house price at the end of 2022 was around £300,000, so let’s say this is the price you agree to buy a house for. Securing a 95% mortgage on a property of this value would leave you with a deposit of £15,000 and a mortgage of £285,000.
If you want to do the maths to work out what your deposit will be, there’s a simple equation that looks like this:
Property value x deposit percentage = deposit amount
In our example, we’ve taken a property value of £300,000 and multiplied it by 5%, like so:
£300,000 x 0.05 = £15,000 deposit
WHAT IS LOAN TO VALUE?
You’re likely to come across the term ‘loan to value’ (LTV) when you buy a home. This indicates how much money you need to borrow against the value of your property. The lower your LTV ratio the better. A higher LTV means you’re in more debt, making you less attractive to a mortgage provider.
It’s easy to work out what your LTV ratio is. All you need to do is divide your mortgage by your house price, and then multiply this by 100 to get the percentage.
Mortgage ÷ house price = loan to value ratio
Going back to our previous example, this means you’ll have a 95% LTV ratio if you buy a £300,000 home with a 5% deposit:
£285,000 ÷ £300,000 = 0.95
0.95 x 100 = 95% LTV
CAN I PUT DOWN A BIGGER DEPOSIT FOR A HOUSE?
Yes, you certainly can put down a bigger deposit to buy a house. In fact, some mortgage companies will demand a higher deposit than 5%, while certain providers will only be willing to lend to a specific level, which may not be enough for you to buy your home. Lenders offer better mortgages when you have a higher deposit, and therefore a lower LTV. So the bigger the deposit you can put down, the better off you’ll be in the long run.
WHAT ABOUT MORTGAGE INTEREST RATES?
The way lenders offer better mortgages for those with a higher deposit and lower LTV is by providing a lower interest rate. This is because there’s less risk attached to providing the finance. Unless you’re on an interest-only mortgage, the amount of money you pay off each month against the total sum you owe will be dictated by your interest rate. A lower interest rate means you’ll pay less each month, and your home will therefore cost you less over the entire mortgage term.
If you have a deposit of 5%, then a mortgage provider won’t be able to offer you as good a rate as if you have a 10% deposit. Your interest rate gets lower and better as you increase your deposit to 15%, while mortgages get very attractive if you have a deposit of 20% or more.
WHAT IS THE BEST DEPOSIT TO PUT DOWN?
There’s no specific number for this, as the amount of deposit each person is able to put down is different. However, it’s recommended to put in as much money as you can up front, as you’ll end up paying less interest in the long run. This applies both to the interest rate you get, as well as the actual amount of money you’re paying interest on.
When deciding how much deposit to put down, you may also wish to target a particular percentage level to gain access to the best interest rates. For example, if you have a 14% deposit you’ll get the same interest rate as if you had a 10% deposit. If you can find the extra 1% to hit the 15% mark and get a better mortgage, this can be well worth it. Likewise, if you have 11% saved up, you may decide to put in a slightly lower deposit as you’ll still get the same interest rate but have a little more cash left in the bank.
HOW MUCH DEPOSIT CAN YOU AFFORD?
When you’re considering how much deposit for a house is needed, you also need to take into account what you can actually afford. Although it can be beneficial in the long term, it’s no good pouring every penny you have into a deposit if it means you’ll be left with nothing in the short term – especially if it puts you into debt.
There are other upfront costs you’ll need to cover when buying a new home, while you may also have to purchase things like new furniture, fixtures and fittings when you move in. Plus there are ongoing costs associated with owning a home, including general maintenance, upkeep and repairs. Don’t leave yourself too stretched to the point where you could be left struggling to afford your mortgage repayments, as your home can be repossessed if you don’t pay them.
WHAT OTHER COSTS ARE THERE WHEN YOU BUY A HOUSE?
Some of the costs you should keep in mind when buying a new home include stamp duty, solicitor fees, searches and surveys, as well as any potential removals costs. There are mortgage setup fees to consider, although these can be absorbed into the total amount loaned to you by a lender. If you use a mortgage broker then there’s a fee for this too, which is usually paid upfront.
If you want to read more about these upfront and ongoing costs, then check out our guide to the cost of buying and moving home. Doing so can help you gain a better understanding of exactly how much you need to pay out when you buy a home, and therefore how much you can afford to spend on your deposit.
If you’re looking to buy a new home or have any questions about the home buying process, get in touch with our team today. We’ll promptly answer your questions and queries.
First Time Buyers Find Perfect Home at Carding Place
As soon as Jodie Conroy and her partner Justin saw the ‘coming soon’ signs for Carding Place, they knew this was where they wanted to buy their first home.