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It’s common for home buyers to wonder what options are available to them with a low deposit.
The good news is: there are plenty of options in the current housing market, although what’s available to you will depend on your other circumstances.
Below, we have outlined the options available to home buyers with a small deposit.
Most lenders prefer that you have a deposit that is at least 20% of the property’s value. This means that you’ll get a mortgage of a loan-to-value (LTV) ratio of 80%, which is the amount you can borrow as a percentage of the property value. For lenders, the larger the deposit you can pay up-front, the less risk you pose. For you, it usually ensures that you get the lowest interest rates, and as a result have lower monthly repayments.
However, many people struggle to save that much, especially first-time buyers. This is why more lenders now offer low deposit loans that come with a high LTV of 90% or 95%. This means you can potentially get a mortgage with just a 10% or 5% deposit. For example, if you’re buying a £250,000 property, a 20% deposit is £50,000. A 5% deposit is just £12,500. That’s a big difference.
While it’s possible to get 100% mortgages – mortgages with no deposit – these require special circumstances.
Saving a 5% deposit is obviously much easier than saving a 20% deposit. But you need to make sure you have money saved up to cover all your other home buying costs. This can include up-front lender’s fees, solicitor’s fees and stamp duty.
While the banks might advertise that you can borrow up to 95% of the purchase price of your new home, it’s important to realise that you’ll have to meet some lending criteria:
In order to incentivise people to buy homes, the UK government has several schemes aimed at first-time buyers to help them get on the property ladder.
Zero-deposit mortgages are largely a thing of the past – banks typically won’t throw 100% of a property’s value at you. But there are some exceptions.
If you have generous parents with some cash in the bank, they might give you part of your deposit as a gift. If you’re able to reduce your loan amount so you’re only borrowing 90% of the purchase price, some banks won’t ask you to prove that you have genuine savings. This means your parents need to come up with 10% of the purchase price and offer it to you as a gift.
While it’s theoretically possible to take out a personal loan and use that as part of your deposit, most lenders will decline such loans. Even if they do grant you the loan, chances are that the mortgage provider will reject your mortgage application.
In the event that you are somehow granted a mortgage, you should understand that you are essentially taking out two loans. Personal loans have much higher interest rates and you’ll have to repay this loan while also making repayments on your mortgage. The slightest change in your financial circumstances could potentially bury you under a mountain of debt. It’s far better to avoid such a risk.
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