Are you looking to climb the property ladder? For first-time buyers, knowing where to begin when looking at properties, considering current mortgage rates, and gathering your bearings for potentially owning your home can be difficult.
As you enter this next step, you must be financially prepared. Before deciding which house you'd like to call home, you must save a deposit. In this article, you'll learn all about mortgage deposits and borrowing to saving ratio, and we've got some valuable tips to help you raise your mortgage deposit.
How Do Mortgage Deposits Work?
If you plan to buy your house with a mortgage, you must put down a house deposit as an upfront payment.
The deposit is a lump sum that lets you own part of the property outright. You pay the remainder of the sale price with a mortgage — a loan you pay in instalments.
A deposit reassures the seller that you're serious about purchasing the house. Consider saving up for a deposit before filling out a mortgage application to give you enough time to save money.
If you start with a larger deposit, sellers may give you a good deal on the overall sale of the house. Additionally, the more you pay upfront, the less your monthly mortgage payments will be.
You may see mortgages with the label loan to value (LTV), which refers to the percentage of your property mortgaged compared to your home's overall value. The lower the LTV, the more significant the proportion of the home you own.
However, the higher the LTV you may be seen as a riskier prospect to sell a property to. You can achieve a lower LTV by putting down a higher deposit to make yourself a more promising candidate.
How Much Money Should You Save for a Deposit?
Saving more money than you might need is always a good thing.
When it comes to mortgages, saving more can only help your situation. Having a figure in mine to work towards is a good idea to avoid saving aimlessly without direction.
Calculate your deposit goal with the following in mind:
- Property price: scoping out the house you'd like is a perfect opportunity to see how much houses sell in your desired area.
- Monthly repayments: calculating how much you can afford to pay each month vs mortgage costs is a great way to work out finances.
- Deposit size: mortgages are available at up to 95% loan to value. You can get on the property ladder with a minimum of 5% of the property price.
Property Prices
You can use property portals like Zoopla and Rightmove to check out the local houses in your area or where you wish to buy a house. Seeing what house prices are on the market will give you a good idea of what you can expect to pay. Equally, you can visit local estate agents to find out more information.
The figures are usually asking prices, so the property's price might be higher than the property's value.
Monthly Repayments
A mortgage has two parts: capital and interest. Capital is the money you borrow, and interest is the charge made by the lender on the amount you owe. Both of these will vary from lender and property.
Mortgage interest rates are prone to change, and interest rates can vary between loans and properties. Although a low interest rate is ideal, it may not be the right deal for you. There are several factors to consider when calculating monthly repayments:
- Up-front fees: mortgage lenders must include mortgage-related fees in the agreement; some upfront fees include arrangements, booking, mortgage account and valuation fees. Additionally, consider your mortgage interest rate on top of monthly payments.
- Other fees: you have to pay stamp duty land tax on properties above £675,000. So, just be aware of any potential fees before you fill out your mortgage application.
- Early repayment charges: if you decide to pay off your mortgage early, there may be a charge of 1–5% of the value of the early repayment.
- Mortgage term: a mortgage loan term can be 5–30 years. 30 years is the average length of a mortgage in the UK. So, using a mortgage calculator, determine how much you’d pay monthly.
Once you've considered the above, you can determine how much you can afford to pay towards your monthly mortgage. The amount will help you decide how much deposit you should save for your future home.
Most banking institutions have a mortgage repayment calculator that you can take advantage of. Additionally, it's a good idea to look around and compare mortgages. Different mortgage providers offer various deals and rates.
Deposit Size
Mortgage loans are available up to 95% loan-to-value so that you can save at least 5% of the overall property price as your deposit.
However, the more money you save for a deposit, the less your monthly payments will be. So, if you save a bigger deposit, you can take out a smaller loan and own more of the property from the start. Most people save between 5–15%.
Your mortgage loan will depend on your good or bad credit, high or low annual salary, outgoings, and incoming. A mortgage lender will lend you four times your average salary for a single application.
They'll lend three times the joint salary for joint applications for shared ownership. The more you save for a deposit, the less you'll need to borrow from a mortgage lender.
So, if you're looking to buy a house valued at £250,000, the deposit amount you'll need to save could look like this:
- 5% deposit: £12,500
- 10% deposit: £25,000
- 15% deposit: £37,000
Ultimately, your deposit will depend on your annual salary and how much you want to borrow for your mortgage. The more you save before taking out a mortgage, the lower your monthly payments will be. Most mortgages require you to put down at least a 5% deposit.
Should You Save a Bigger Deposit?
You can save 5% if you wish, but there are benefits to saving more that could help you out further down the line.
Additionally, the more you save, the better position you'll be in when applying for a mortgage loan.
The benefits of saving a bigger deposit are as follows:
- Greater chance of acceptance: by having a lump sum upfront, you show your commitment to the seller that you're serious about buying the home. They may even offer a lower sale price than the actual property value.
- Cheaper monthly mortgage payments: the more you pay upfront, the less you'll pay later. You can potentially pay lower mortgage payments than you would pay rent for renting.
- Better mortgage deal: the larger your deposit, the cheaper your mortgage rate will be. So, you'll be open to a broader range of mortgage deals if you have a larger deposit. Additionally, mortgage interest rates are lower at 85% LTV compared to 95%.
- Less risk: the more of your home you own outright, the less likely you'll fall into negative equity. Negative equity means you could owe more on your mortgage than your property value, avoid this by putting down a bigger house deposit so you own more of your house.
- Bigger budget: mortgage lenders offer up to four times your salary. However, if your salary is relatively low, it may not cover the entire cost of your desired property. So, you may need to save more than the minimum deposit to reduce the mortgage loan cost.
So, now you know the benefits of saving for a bigger mortgage deposit, we've compiled a list of helpful tips to help you get there.
Tips for Raising Your Deposit
Saving for a deposit can be challenging for first-time buyers, but there are simple things you can start doing to help get yourself on the housing ladder sooner.
Tips for saving for a mortgage deposit:
- Savings account: whether single or getting a mortgage with another person, you should have an individual savings account. A savings account is a great place to store extra cash and gain interest while saving for a deposit.
- Lifetime ISA: a long-term savings and investment account designed to help people between 18–40 save for their first home or retirement. With a lifetime ISA, you can save up to £4,000 a year in the account and receive an annual 25% government bonus. Consider opening a lifetime ISA to store spare cash.
- New mortgage guarantee scheme: in 2021, the UK government introduced a mortgage scheme to help first-time buyers. The scheme is available until the end of December 2023, and it will help you by providing you with a 5% deposit on a house worth up to £600,000.
- Reduce your bills: consider switching your utility providers to get a better tariff deal on your energy bills. Additionally, look for cheaper broadband packages, and cancel any unused subscriptions.
- Budget spending: look at your monthly spending and see if you can budget your outgoings to help save for your house deposit.
- Earn on spending: take advantage of rewards schemes and cashback offers on your everyday shopping. Use any special offers and discounts to help add to your deposit fund.
You're ready to start saving for your future home.
Final Thoughts
With an idea of how much deposit you need to get a mortgage and tips for saving, you'll be in your new home soon enough.
Before you search for your future home, you should know that house prices fall and rise over time, so looking around for your dream home is a good idea before settling immediately. You might find it’s not the right time to buy a house. However, it’s never too early to start saving for the deposit.
You can start saving by looking for a new savings account. Where do you even begin? With CompareBanks, you can compare savings accounts and find other financial tools from various financial institutions across the UK.
