Deposit for buying a property in the UK

The deposit, is the percentage of the price of the property you are buying that you have to cover with your own funds. Having helped to buy around 150 houses and flats each year, we can tell you that around half of our customers have to postpone their plans to move precisely because they are having trouble raising enough cash. Where do these difficulties come from? 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.

Why do banks require a deposit?

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.

Contrary to popular belief, the FCA, or Financial Conduct Authority, does not prohibit mortgages without a deposit, as is the case in some countries in Europe.

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

As a general rule, all banks require the borrower’s deposit to take the form of cash or funds accumulated in an account, and only some financial institutions accept property sureties. 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?

Some lenders have introduced the term BMV, or Below Market Value properties. This term refers to houses and flats that are sold below their actual value. Although the LTV ratio will of course be correspondingly low in such a situation, a deposit will still be required. If necessary, we are able, on request, to find a bank that will be willing to do otherwise, but this is not always possible and may translate into poorer mortgage repayment conditions.

How much is the mortgage deposit in the UK?

Banks offer a wide range of mortgage products that differ, among other things, precisely in the amount of your deposit. In the vast majority of cases, it affects the interest rate - the higher the deposit, the less you will pay.

How much is the mortgage deposit in the UK?

Many banks offer mortgages with a 5% to even 40% deposit. However, it usually turns out that products with a 10% to 15% deposit perform relatively best - higher thresholds, such as 25%, do not translate into significantly better interest rates. On the other hand, mortgages with a 5% deposit are relatively expensive, which drastically affects the affordability of the borrower.

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. Let us mention:

Lifetime ISA

The Lifetime ISA is a scheme designed to make it easier for UK residents to save money for retirement in the long term. However, few people know that a 25 per cent top-up from the Government can also be used to contribute towards the purchase of a property on mortgage, as long as the account holder has First Time Buyer status. Each year, you are able to raise an extra £1,000 this way, which is a substantial cash injection.

Mortgages without deposit

Although the range of no-deposit mortgages on offer is very limited and the criteria for granting them means that many people will not be able to take up this opportunity, it is worth considering this segment of the market. Typically, no-deposit mortgages are dedicated to young people with first time buyer status who have previously rented some property in the UK.

Loan for deposit

Let’s point out straight away - borrowing money to put towards your mortgage is not a wise move and can be the first step to a debt spiral. However, if you are sure you know what you are doing, you can, with our help, find a bank that will agree to such a move. Let us point out, however, that the number of such banks is very small and that a deposit loan can greatly reduce your creditworthiness.

Shared ownership

Shared ownership is a scheme that changes the nature of property ownership - you only purchase a share of your home and pay monthly rent for the remainder. By force, the mortgage amount as well as the deposit will be lower, making shared ownership a more accessible step towards financial freedom. We would also add that after a few years, your landlord will most likely allow you to gradually increase your share of the property, so your wealth will grow.

Is it worth waiting longer to make a larger deposit?

It depends. If you know it will take you 2 or 3 years to raise an extra 5% deposit, it doesn’t make any sense at all, as you will be forced to pay thousands of pounds in rent on your existing house or flat over that time. However, the situation is very different if your earnings are high enough that it will take you a few months to accumulate another 5% of the value of the house you are buying.

Is it worth waiting longer to make a larger deposit?

When deciding on a mortgage, remember that you can switch providers after a few years. Remortgage allows the bank’s margin to be gradually reduced as the capital is repaid, so an initial 5% deposit is no bad thing for your finances.

A mortgage on your terms

If you are reading this article, you are most likely planning to buy a home in the UK, which you will finance using a mortgage. To make sure you won’t be paying too high instalments, use the services of specialists who deal with finance on a daily basis. The Extend Finance team will be happy to help you find a deal that’s perfectly suited to your needs. Don’t wait - take a step towards the immense mental comfort that comes with having your own home!