Deposit for buying a property in the UK

The deposit is the part of the property’s purchase price that you cover from your own funds. How much money do you need to have in your account to buy a property in the UK? Let’s find out!

Why do banks require a deposit?

In the simplest terms, the deposit protects the bank against a sudden drop in the value of the property that the mortgage is secured by.

The idea of a deposit on a mortgage is relatively straightforward - if you, as a customer, borrowed 100 per cent of the value of the property you were buying from the bank, then stopped making the instalments shortly after the purchase, the collection costs, court fees and other costs that occur when a home is forcibly repossessed for debt could lead to a financial loss for the bank. However, if the mortgage amount is a few per cent less than the value of the house or flat, this risk drops dramatically.

On the other hand, raising £10,000, £15,000 or £20,000 demonstrates that the borrower is able to handle the money sensibly over an extended period of time and is confident about buying the property. In a way, it can be assumed that the deposit is a prerequisite for considering the customer as a person who will not waver after a while and is unlikely to abandon the mortgage repayment.

UK rules do not ban mortgages without a deposit: a small number of lenders offer 100% loan-to-value mortgages to eligible borrowers.

Does the deposit for a UK mortgage have to be paid in cash?

Most lenders expect the deposit to come from your own savings or an acceptable gift, usually from close family, and you may be asked to show where it came from. A few lenders accept other arrangements, such as family-backed security, and some offer 100% mortgages with no deposit. It is also worth noting that already at the mortgage application stage, you may be asked to prove that you have a deposit. Such proof could be, for example, a statement from a savings account.

What about when I buy a house below its market value?

Buying a property below its market value (BMV) does not by itself reduce the deposit you need. Some lenders, such as the Co-operative Bank, calculate the loan-to-value (LTV) on the lower of the purchase price and the valuation, so with those lenders the discount does not count towards your deposit and you still need a cash deposit. When you buy from a family member below market value, some lenders accept the discount (‘gifted equity’) as all or part of the deposit, but this depends on the lender’s criteria. Acceptance depends on the individual lender’s criteria and underwriting; there is no guarantee that a suitable mortgage will be available.

How much is the mortgage deposit in the UK?

Lenders offer a wide range of mortgage products, and one of the main differences between them is the size of the deposit you need. A larger deposit usually gives you access to lower loan-to-value bands, which often come with lower interest rates, and it also means you borrow less.

You’ll usually need a deposit of at least 5% of the purchase price, and many lenders price their deals in bands from 95% down to 60% loan-to-value or lower. Rates usually fall as you move into lower loan-to-value bands, and the most competitive deals are typically available with a deposit of around 40% (60% LTV). How much you save between bands varies over time. Mortgages with a 5% deposit (95% LTV) usually carry higher interest rates than lower-LTV deals, which increases your monthly repayments.

Are there ways to reduce the amount of the deposit?

Fortunately, there are several ways to make the deposit at least a little less of a burden on the borrower. These include:

Lifetime ISA

A Lifetime ISA lets you save towards your first home or for later life. You must be 18 or over but under 40 to open one. The government adds a 25% bonus, which you can use towards your first home if it costs £450,000 or less, you buy at least 12 months after your first payment in, and you use a conveyancer or solicitor. You can pay in up to £4,000 a year, so the bonus is worth up to £1,000 a year. Withdrawing for other reasons before age 60 usually means a 25% withdrawal charge. The government has consulted on replacing the Lifetime ISA with a new First Time Buyer ISA, so check GOV.UK for the current rules before opening an account.

Mortgages without deposit

Only a small number of lenders offer 100% (no-deposit) mortgages, and their eligibility criteria are strict. Some no-deposit mortgages are aimed at renters who can show 12 months of on-time rent payments and who have not owned a home in the UK recently. You can read more in our guide to mortgages without a deposit.

Loan for deposit

Borrowing money for your deposit adds to your debts and monthly outgoings, so it is rarely a good idea. Whether a borrowed deposit is acceptable depends on the individual lender’s criteria and underwriting. Few lenders accept a borrowed deposit, and repayments on a loan used for the deposit are counted when the lender assesses affordability, which can reduce how much you can borrow.

Shared ownership

In England, shared ownership lets you buy a share of a home (between 10% and 75% of its full market value) and pay rent on the rest, usually plus service charges. The rules are different in Scotland, Wales and Northern Ireland. Because you buy only a share, the mortgage and the deposit you need are lower. You can usually buy further shares (‘staircasing’) of 10% or more at any time, or on some newer homes 1% a year for the first 15 years. The price depends on the home’s value when you buy, and you’ll need a RICS valuation and may pay an administration fee.

Is it worth waiting longer to make a larger deposit?

It depends. Whether waiting pays off depends on how long it will take you to save, how much rent you pay in the meantime, how house prices and mortgage rates move, and how much you would save by moving into a lower loan-to-value band. If you could add another 5% within a few months, waiting may be worthwhile; if it would take years, the extra rent can outweigh the saving.

When choosing a mortgage, remember that you can switch deals when your initial rate ends. As you repay your mortgage, and if your home’s value holds or rises, your loan-to-value falls, which may give you access to lower rates when you remortgage. This is not guaranteed, and fees or early repayment charges can apply.

A mortgage on your terms

If you are planning to buy a home in the UK, Extend Finance can help you explore mortgage options based on your circumstances and the products available. Contact our team to discuss your plans and the costs and conditions that may apply.