Low deposit mortgages

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.

How small can my deposit be?

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.

Is it harder to get approved for a low deposit mortgage?

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.

• Good credit history. In order to get your loan approved at a high LTV like 95%, you will need to have a clean credit history. This means you should have no defaults showing on your credit report for missed payments on other bills.
• Good employment history. Some lenders require you to have spent as much as three years in the same job before offering you a mortgage, while some may ask for as little as three months. In the case of low deposit mortgages it’s likely that most providers will want you to be able to show that you have a stable job.
• Genuine savings. If you can show where your 5% savings came from, this will go in your favour. For example, showing your savings account statements with regular deposits going into it will be viewed positively.
• Controlled debts. If you submit your mortgage application and it shows that you have several credit cards, a car loan and a personal loan all outstanding, it’s likely your loan will be declined. Consolidate your debts and pay off the most urgent ones. For example, credit card debt is a bigger red flag for a lender than a student loan.

Finder survey: Is it better to get on the property ladder when you can, or wait until you've got a larger deposit?

First-time buyer schemes

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.

• Shared ownership. Shared ownership schemes allow you to buy a share in a property through a council or housing association, and pay rent on the part of the property you don’t own. You need a mortgage to pay for your share, which can be between 25% and 75% of the property’s full value. You then pay a reduced rent on the share you don’t own. Later you can choose to buy a larger share in the property up to 100% of its value. This scheme is available for anyone who has a household income of less than £80,000 (outside London) or £90,000 (in London). Only military personnel get priority over other groups.
• Help to Buy. This scheme is aimed specifically at first-time buyers. It allows you to get a low-interest loan towards your deposit in the event that you can’t save a large enough deposit. For example, if you have savings for a 5% deposit, the government will lend you up to 20% ( 40% in London) interest-free for five years. As a result, the mortgage you get will be for 75% (55% in London) of the property’s value. This scheme comes with some conditions.
• Home Ownership for People with Long-Term Disabilities (HOLD). This scheme applies if you have a long-term disability. You can only apply for HOLD if the properties available through the other home ownership schemes don’t meet your needs; for example, you need a ground-floor property so you don’t have to climb stairs.
• Older People’s Shared Ownership. If you’re aged 55 and older, you can get help from a home ownership scheme tailored for older people. It works in the same way as the general shared ownership scheme, but you can only buy up to 75% of your home. Once you own 75%, you won’t have to pay rent on the remaining share.

Can I still get a 100% mortgage?

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.

• Guarantee from parents. If your parents own their home and are happy to act as guarantors on your mortgage, you could borrow 100% of the purchase price of your new home without having any savings. Essentially, the bank takes a guarantee from your parents that is secured by the equity they have in their own property. Just be absolutely sure that you and your parents understand all the implications of being a guarantor before you enter into this type of agreement.
• Existing property. If you already have equity in your family home, you may be able to use this to secure the purchase of your next property. Effectively, this lets you borrow 100% of the purchase price of your new property without having any savings.

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.

Can I take out a personal loan for a deposit?

While it’s theoretically possible to take out a personal loan and use that as part of your deposit, it’s not advisable and it would hit multiple obstacles.

Banks issuing personal loans will ask why you need a loan, and won’t approve one for the purposes of securing an even larger loan. At the same time, you prospective mortgage lender will ask where the funds for your deposit have come from, and won’t want to hear that it’s a loan. So even if you did get approved for a personal loan, chances are that the mortgage provider would reject your mortgage application.

Any loan, whether issued by a bank or friends/family, is a financial commitment. From a mortgage lender’s point of view, this must be taken into account when considering how much to lend and whether or not to approve a mortgage.

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.