How much deposit do you need for a house?
When it comes to buying your first house, it can feel tricky knowing where to start. Our guide for first-time buyers explains saving for a deposit and how to work out what you can borrow…
How much deposit do I need to buy a house?
Before you start looking at properties, you’ll need to save for a deposit which banks require as an assurance or security on the mortgage they lend you.
From April 2021, following the government’s announcement of a new mortgage guarantee scheme, it’s now possible to get a mortgage with a 5% deposit, with several banks having signed up to offer 95% mortgages. Although there are a limited number of suppliers accepting smaller deposits at the moment, so you may get a better mortgage deal with a bigger deposit.
To work out how much you need to save for a deposit, it may be a good idea to decide how much you can afford to borrow. For a £250,000 property, you’d need to put down the following as a deposit:
5% deposit: £12,500
10% deposit: £25,000
15% deposit: £37,500
How much can I borrow?
The amount you’ll be able to borrow as a mortgage loan will depend on your current debts, outgoings and incomings. Lenders will look at your salary in the following way:
For single applicants, they’ll usually lend you four times your annual salary
For joint applicants it’s generally three times the joint salary or four times the first salary plus the second salary
It’s worth bearing in mind that under mortgage market rules means lenders also factor in your personal expenses, such as bills, debts and childcare.
This means they’ll have a more accurate picture of how much you can afford, but also the more of these outgoings you have, the less you’ll be able to borrow. Lenders need to know you can afford to repay the loan.
The amount you need to borrow as a first-time buyer can vary widely depending on where you live, as house prices vary by region. The south is generally more expensive than the north when it comes to house prices. London’s average house price is the most expensive of any region in the UK at an average of £496,000, compared to the North East having the lowest average house price at £141,000, as of December 2020.*
* According to the UK House Price Index - Office for National Statistics
Our mortgage calculator can help you to work out how much you can afford to borrow, by looking at your salary.
Loan to value (LTV)
You’ll usually see mortgages being described as a certain ‘loan to value’, known as ‘LTV.’ In basic terms, this means the percentage of the property’s price that will be covered by the mortgage. So, if the property purchase price is £300,000, and you have a 10% deposit (£30,000), you’ll need to get a mortgage of £270,000, meaning the loan to value of the mortgage is 90%.
Should I save for a bigger deposit?
With a first-time buyer mortgage, you’re likely to be looking for a 90% or 95% mortgage deal (meaning you’ll need a 5% or 10% deposit saved.) When it comes to borrowing money in any capacity, it all comes down to risk. The bigger deposit you put down, the lower the risk you are to the lender and the more deals you’re likely to have access to from providers.
The bigger the deposit you can save the stronger position you should be in. This is because mortgage interest rates are lower at 90% LTV compared to 95%
A bigger deposit also means a lower mortgage interest rate – which means lower monthly repayments
You’ll be at a lower risk of negative equity if you have a bigger cash deposit to put down
If house prices rise while you are saving up a bigger deposit, the amount you’ve saved is reduced as a percentage of the house value
You could be paying rent while you wait to buy which some see as wasting money
Can I get a 100% mortgage?
Few mortgage lenders offer 100% mortgages – where you are borrowing the full value of the property and have no cash deposit. In most cases a 100% mortgage is only available through guarantor mortgages, meaning you’ll need a guarantor, usually a parent, who will be responsible for paying the mortgage if you are unable to do so.
While a 100% mortgage means you don’t need to save for a deposit, it carries bigger risks. If house prices fall you are at risk of negative equity. This is where your home or property is worth less than the amount you’ve borrowed. So, if house prices were to fall, and you borrowed 100% of your property’s value, you could end up in negative equity.
How to raise a deposit
Saving for a deposit as a first-time buyer can feel like hard work, especially with rising house prices. From savings accounts to help to buy schemes, there are ways you can get into the savings habit, including:
Lifetime ISAs: With this savings scheme, the government will pay in £1 for every £4 you save. You can invest a maximum of £4,000 a year towards your first home
Regular savings: Why not set up a direct debit into your savings account? Depositing a fixed amount of cash into a separate account each month means you’re less likely to touch it!
Saving/budgeting apps: There are a number of apps that save your spare cash, which can help you build up a deposit fund.But bear in mind they don’t usually pay interest on the amount saved
Assess your living situation: Is your rent too expensive for you to save? Some first-time buyers move back in with their parents or go into a flat share, while they’re saving for a deposit
Can I get a deposit from family?
If your family choose to help towards your house deposit, or can pay the whole amount, this is known as a gifted deposit. It’s important to note that this money would be ‘gifted’, not a loan, meaning it wouldn’t need to be paid back. The family member who gifts you the money wouldn’t get any stake in the property in return either.
Receiving help towards your deposit from family may mean you have a bigger deposit to put down, which can mean a lower interest rate and lower monthly mortgage repayments.
Help getting your first house
When you’re a first-time buyer, getting on the property ladder can feel like a struggle – especially with house prices rising. There are a number of support schemes and alternative options available to help you get a mortgage, including:
The help-to-buy ISA was a type of savings account available to open until 2020. While the scheme is closed for new applicants, if you already have a help-to-buy ISA, you can still use it. You can only deposit £200 a month into the account, and for every £200 saved the government will contribute a £50 bonus towards your first home.
Remember that you’ll only receive the government top-up when you buy a property, so you won’t get the 25% bonus if you use your savings to buy something else.
Shared equity schemes can offer a way into property ownership when house prices would otherwise be out of reach. With shared equity, you’re getting a start on the property ladder but only have a ‘share’ in the property you buy by using a loan for the deposit on your home. You can then take out a shared equity mortgage on the part of the property’s value leftover.
While ‘shared equity’ may give the impression you’re sharing your property with someone else, your home will still belong to you entirely. The name ‘shared equity’ refers to the taking out an equity loan which counts towards your deposit.
Some lenders have introduced specialist mortgages deals for first-time buyers which only require a small deposit. Lenders like Lloyds Bank have a ‘Lend a Hand’ mortgage available for first-time buyers who have a deposit of at least 5% saved. From there, you’ll need a friend or family member known as a ‘helper’ who is willing to put up savings of a further 20% of the property value.
Will I have to pay stamp duty?
Stamp duty is a type of tax you need to pay if you buy a property or land that costs more than a certain amount, in England and Northern Ireland. If you live in Wales or Scotland, equivalent land taxes are applied but the thresholds may vary. More information can be found in our stamp duty guide.
First-time buyers in England and Northern Ireland don’t pay stamp duty on the first £300,000 of property value, provided the total purchase price is £500,000 or less. After this they must pay 5% on the portion of value between £300,001 and £500,000.
For homes costing more than £500,000 you’ll pay the same stamp duty as someone who has bought before:
For the first £125,000 the rate is 0%
From £125,001 to £250,000 the rate is 2%
From £250,001 to £925,000 the rate is 5%
From £925,001 to £1,500,000 the rate is 10%
From £1,500,001 and upwards the rate is 12%
Other costs associated with a mortgage
On top of your deposit and monthly repayments, there are other costs associated with a mortgage that you’ll need to factor in, including:
Arrangement fee: A mortgage arrangement fee is what you pay for the mortgage product itself, which can cost anything up to £2,000. It’s likely that you’ll be given the option of adding this to your mortgage which means you can avoid an up-front cost, but can increase your payments overall as you’ll pay interest on it
Valuation fee: Where the mortgage provider assesses the value of the property you’re buying to make sure it’s worth the amount they’re going to lend you. Your valuation fee will depend on your property’s value and can cost between £100 and £1,000
Booking fee: This is the cost of applying for a mortgage. Some lenders combine booking and arrangement fees, while others charge them separately.For many lenders this isn’t a refundable payment, so if you change your mind and decide not to go through with the mortgage, you won’t get your money back
Mortgage account fee: This is the administration cost of your mortgage for your lender and generally costs up to £300
CHAPS: A Clearing House Automated Payment System (CHAPS) covers the cost of your mortgage provider sending funds to your solicitor. This payment is often non-refundable and usually costs up to £50
Compare mortgages with MoneySuperMarket
As a first-time buyer, using a mortgage comparison tool can help you get a good idea of the kind of mortgage deals available. When you enter your information into MoneySuperMarket’s mortgage comparison tool, you’ll be able to compare example mortgage quotes from different providers.
The comparison tool doesn’t take into account your financial situation or your credit history, so it’s still important to get an agreement in principle. Remember that any monthly repayments and rates you see could change when you apply for a mortgage in principle and a mortgage offer, once the financial checks have been carried out.
Your home may be repossessed if you do not keep up repayments on your mortgage.