When it comes to getting on the property ladder, the deposit can often be a major hurdle. Rising house prices mean that homebuyers these days often have the perception that they need to put down up to tens of thousands of pounds as a deposit, which can be next to impossible if you don’t have a high paying job, a chunk of savings, inheritance or family to help out.
So, if your deposit is the only thing standing in the way of you and your dream home, this guide to deposits will help you break down the obstacles and put you on the path towards home ownership.
- Deposits explained
- How much of a deposit do you need?
- Deposit sources
- Help To Buy
- Money Saving Tips
A deposit is the sum of money you need to put down, that goes towards the cost of the property you’re purchasing.
The deposit usually proves to banks and lenders that you’re financially responsible, sensible with your money and disciplined. This all makes you less of a risk to the lender.
The general rule is: the higher your deposit, the lower your interest rates and monthly mortgage repayments will be.
What is LTV?
‘Loan To Value’ or LTV is often thrown around when talking about deposits. This is simply the percentage of the home you own outright, compared to the percentage you’re borrowing.
For example, if you’re buying a home that costs £100,000 and you have a 10% deposit of £10,000 then your LTV is 90%.
How much of a deposit do you need?
Generally, the rule is; the higher your deposit, the better, as you’ll have access to a wider variety of lenders and better deals. It also lowers the cost of your monthly repayments.
Loan to value bands tend to drop in 5% increments – starting at 95% and dropping to 60% LTV and below. The 60% band is the lowest band, where all the best deals kick in.
At the present moment, it is recommended that you aim for a deposit of 15% of the property’s value. Before the Covid-19 pandemic many lenders offered the option of buying with a 5% deposit but now these options are quite limited.
It’s likely that the mortgage lender will want to know where your deposit has come from, as some lenders will accept from certain sources that others won’t.
If you’re really struggling to save the deposit you need, this is something to really bare in mind – doing the lottery and crossing your fingers every week might not be the answer.
Here are the most common sources for deposits:
- Personal savings, inheritance and investments. Most lenders will be happy with this and others will want proof.
- Gifts. Most lenders will be happy to accept loans from family members but many will not accept when the source of the gift is a non-related third party, due to the risk of money laundering and fraud.
- Sale of assets, eg car, art, valuable belongings. If it is legally sold, it will be generally accepted by most lenders. Some may want to verify that the money is from a legitimate source.
- Credit cards and personal loans. Very few lenders will accept a deposit from these sources.
- Gambling. If you’ve had a big one-off win, lenders may accept but if you gamble regularly some may take issue and see you as financially unreliable.
- Money from overseas. Many lenders will decline a deposit from overseas as it can be very difficult to legitimise the source and rule out the risk of money laundering.
If you’ve been thinking about buying a property for a while now, you’ll probably have heard about government help to finance the purchase. If you’re between the ages of 18 and 40, a Lifetime ISA is a great option.
Here are some things you should know about the Help To Buy ISA…
- With this ISA, the government will boost your savings by 25% up to a maximum off £1,000 per year
- You can put in up to £4,000 each year, until you’re 50. You must make your first payment into your ISA before you’re 40.
- The Lifetime ISA limit of £4,000 counts towards your annual ISA limit. This is £20,000 for the 2022 to 2023 tax year.
- You can hold cash or stocks and shares in your Lifetime ISA, or have a combination of both.
Money saving tips
- Set a savings goal. Know your target and set a deadline so you have a clear idea of how much you need to put away each month. Remember there will be months where you won’t be able to save as much, as your outgoings may be higher or you might have an unexpected expense.
- Use your apps. There are a range of finance, money, saving and banking apps out there with specially designed features to help you save. Many have ‘spare change’ type features that round up all your purchases and save up all the spare change for you.
- Open up a savings account. Whether it’s the Lifetime ISA or another type of account, having a separate savings account for your deposit funds helps you focus on your goal. You can open an instant access account but if you have doubts about your discipline, accounts with withdrawal limits can help keep your money safe and may also have a better interest rate.
- Direct debit. Set up a direct debit that takes money from your current account as soon as you get paid and puts it straight into your deposit savings account, so you don’t even have to think about it.
- Audit your spending. Take a long, hard look at your typical monthly outgoings to see where you could potentially save. Many apps will also have summary features to show you where you are spending most. For example, on groceries or clothes or takeaway meals.
- Cancel subscriptions. Take the time to cancel any useless subscriptions or memberships that come out of your account every month. Even if it’s just £5 per month, every saving adds up.
- Cut back on luxuries. Really strip your saving to the bone and cut back on things you don’t necessarily need. It could be something big like going from two cars to one car between you and your partner or simply eliminating your daily coffee, which could save you over £700 a year!
For more information on all things mortgages, visit PropertyPal.com/mortgages
Last modified: 13/06/2022