How to Buy Your First Home with a Small Deposit

What Is a Mortgage Deposit?

A mortgage deposit is the money you contribute towards buying a property with a mortgage. A mortgage broker like John Charcol will help you figure out how large a deposit you need to provide when applying for a mortgage, based on your income and the property you want to buy.

The minimum deposit for a mortgage on a main residence is 5% of the value of the property you want to buy, but it’s worth putting down at least 10% if you can as it’ll give you access to far more – and much better – rates. (There are special cases for no deposit and Family Springboard mortgages too).

Some lenders offer 95% mortgages, for which you'll only need to put down 5%. However, these products aren't as common as 90% LTV mortgages so the rates tend to be higher.

This leads us on to something called LTV (loan-to-value). LTV refers to the relationship between the loan (mortgage) and the value of the property.

Here’s how it works:

• If you provide a 5% deposit, then you’ll need to take out a mortgage on the remaining 95% of the property value. The LTV in this scenario is 95%
• If you provide a 10% deposit, then you’ll need to take out a mortgage on the remaining 90% of the property value. The LTV in this scenario is 90%

The higher your deposit, and the more of the property value it covers, the lower your LTV and the less you need to borrow on your mortgage.

How Much of a Deposit Do I Need?

The minimum deposit you need for a mortgage on a main residence is 5% or the property value, but it's generally a good idea to save around 10% if you can. Although both are considered relatively small deposits. How much this actually amounts to will depend on the value of the property.

How much you need for a deposit in monetary terms will depend on the value of the property you're buying, how much you can borrow earn and whether you're buying the property on your own or with other people. Buying with another person makes it a bit easier as you can combine your savings to make up the deposit you need (e.g. 10%) and your combined incomes will allow you to borrow more on a mortgage overall.

To determine how much you'll need to save in deposit, think about the type of property you want to buy and whether you'll be buying with other people or alone. Sites like Zoopla and Rightmove will give you a good idea of property prices in your chosen area. You can typically borrow up to 4.5 times your annual salary from a mortgage lender. But this will be subject to mortgage affordability and what deals are available at the time. You can then work out how much you might be able to borrow and the difference between that and the price of the house you are hoping to buy.

Of course, it will help if you can save more than the minimum deposit, as this will reduce the amount you'll have to borrow and means you'll be paying less interest to the lender. You'll also have access to better mortgage deals, cheaper monthly repayments and a better chance of having your mortgage application approved.

You can work out if your deposit meets the minimum requirements for a mortgage on the house you want to buy with our loan-to-value mortgage calculator.

You can then use our calculator to work out how much you can borrow based on your annual salary and see if this amount – combined with your deposit – is enough to buy the property you want. If it’s not, you’ll need to consider other options – which we’ll go through below.

Keep in mind that there are several other costs you'll need to save up for when buying a home, including solicitor and mortgage fees, Stamp Duty – if the property you want to buy is over £300,000 - valuation fees, surveys and moving costs. As a first-time buyer, you may also need to factor in the costs of buying furniture.

Help Buying Your First Home with a Small Deposit

Finding it near impossible to save a bigger deposit? Here are some options specifically designed to help you buy your first home with a small deposit.

Help to Buy Equity Loan Scheme

The Help to Buy scheme runs until March 2023 and allows first-time buyers to purchase a new build property with a 5% deposit. For first-time buyers in England and Greater London, the Government will lend up to 20% of the cost of a new build property, or up to 40% if the property is in London. There are different equity loan schemes across England, Greater London, Wales, and Scotland.

For the first 5 years, the equity loan is interest-free and you won't have to make any repayments during this time. You can also use contributions from a LISA to pay towards this. As the equity loans helps make up a larger deposit, you won't have to borrow as much from your lender, which means your initial mortgage repayments will be lower.

To qualify for this scheme, you need to make your reservation for a new build property by the end of October 2022.

Shared Ownership

Shared Ownership allows you to buy a share of a property and then pay rent on the rest. You'll only need a mortgage for the share of the property that you're buying, allowing you to put down a smaller deposit. Depending on what your lender says you can afford, the share of the property you buy will be between 25% and 75% of the property's value. For example, on a £230,000 property:

• A 50% share requires a 5% deposit, equivalent to £5,750. You'll pay rent on the remaining 50%
• A 25% share requires a 5% deposit, equivalent to £2,875. You'll pay rent on the remaining 75%

One of the great things about shared ownership is that you can buy chunks of the equity in your property bit by bit from the council or housing association your currently renting part of it from. This is called staircasing.

How Your Credit Score Can Help You Buy Your First Home

As part of your mortgage application, the lender will look at your credit report when considering whether to lend to you. If you have a small mortgage deposit, improving your credit score could help to increase your chances of the lender approving your application.

It's a good idea to check your current credit score with one of the 3 main credit agencies to see how you'll look to a potential mortgage lender. These are TransUnion, Equifax and Experian. Go through your report carefully and make sure any mistakes are corrected. If your credit score is fairly low, you can boost it by ensuring you are on the electoral register, paying all your bills on time and using your credit card responsibly.

What Are the Pros and Cons of a Low Deposit Mortgage?

An obvious positive of a low deposit mortgage for first-time buyers is getting on the property ladder more quickly and easily as you don’t need to save as much upfront. However, while that's a clear benefit, you won't have the same choice of mortgage products as fewer lenders are happy to offer mortgages to buyers with a small deposit of 5%. You may also be required to pay more in fees.

From a lender's perspective, low deposit mortgages are riskier, so you'll likely have to pay a higher interest rate on the mortgage, particularly with a deposit of 5%. This means that the overall cost of borrowing will be higher.

There's also a greater risk of negative equity when you put down a small deposit if house prices fall and the size of your outstanding mortgage is more than the home's value. This can make it difficult to remortgage and get a new deal when your initial fixed-rate contract ends. You may also struggle to raise enough money from the sale of your house to clear your existing mortgage or put down a sufficient deposit on a new property if you decide to move.

You’ll have a greater variety of options, access to lower first-time buyer mortgage rates, less chance of negative equity and have to pay back less overall if you can save a slightly bigger – although still small – deposit of 10%.

Can I Get a Zero Deposit Mortgage?

If you're finding it extremely difficult to save up a big enough deposit to buy your first home, you may be able to get on the property ladder with a 100% loan-to-value (LTV) or no deposit mortgage. These types of mortgages are available through different lenders and each have different names, such as Family Springboard mortgage and Family Assist mortgage. With these 100% mortgage products, you borrow the full property value without putting down a deposit in the traditional sense. Instead, a family member puts money into an interest-earning savings account with the lender – typically about 10% of the value of the property you’re buying – and the lender grants you a mortgage on 100% of the property. The money in the savings account acts as a kind of placeholder deposit until you’ve paid back a certain amount of the mortgage loan and the money is released back to the family member. There’s also another option with this kind mortgage, whereby the lender puts a charge on the family member’s property instead of the family member putting money into a savings account. No payments are made towards this charge and it is removed once you’ve paid back a certain amount of the mortgage.

Got the Deposit But Low Income Limiting Your Maximum Borrowing?

You may have heard of a guarantor mortgage. This is different from a no deposit mortgage. With a guarantor mortgage, a family member guarantees to meet your mortgage repayments should you be unable to. Mortgages with guarantors aren't really available anymore, instead lenders offer joint borrower sole proprietor setups. Joint borrower sole proprietor setups can allow you to borrow more overall on your mortgage, so they're helpful for people with low incomes who want to boost their maximum borrowing. If you'd like to know more about joint borrower sole proprietor, speak to an adviser on 0330 433 2927.

When to Show Proof of Deposit for a Mortgage

When you apply for a mortgage, you'll need to prove how you funded your mortgage deposit. As part of strict anti-money laundering rules, your lender will need to be able to trace the deposit money to ensure it has come from a legitimate source. Depending on where the money for the deposit has come from, you'll be required to provide bank account statements, contractual agreements, or other forms of certification.

If you cannot show proof of where your deposit has come from, or your lender determines that it has come from a non-approved source, they'll probably decline your mortgage application.