There are a lot of different factors that can determine how much you need to put down as a deposit for a mortgage. In this guide, we will cover the different types of mortgages and how much is required as an initial deposit for each type.
Different types of mortgages
Repayment mortgages
Also known as a capital and interest mortgage, repayment mortgages are usually paid back in monthly instalments and the payments cover the money you have borrowed as well as interest on how much capital you have left over. Once your mortgage term is up, you’ll have paid off the interest loan in full meaning you will only have the capital left to pay.
Interest-only mortgages
With an interest-only mortgage, you only repay the interest on the mortgage loan – you don’t actually pay off any of the mortgage. Usually, interest-only mortgages offer lower monthly repayments but will only cover the interest on the loan. At the end of the term, you will then have to pay off the total amount.
Fixed rate mortgages
With a fixed rate mortgage, your interest rate will stay the same for the duration of your initial loan period, which is usually between 1 and 10 years. After the initial loan period ends, your rate will be changed to the default standard variable rate of your lender.
Standard variable rate (SVR) mortgages
An SVR is the default interest rate set individually by the lender. The rate is decided by the lender and they are free to adjust it at any point. SVR mortgages aren’t actually offered out by lenders, however once a mortgage deal has expired or is in its out of deal period, they are often automatically switched over to SVR mortgages.
Discounted rate mortgages
This is a variation of an SVR mortgage, where the lender offers a discounted rate over a certain period of time. It is a variable rate however, so the amount you pay each month is subject to change if the lender changes their SVR.
Tracker mortgages
This is a type of variable rate that is subject to change each month. Tracker mortgage rates follow a specific interest rate that will determine what you pay each month. The benefit of this can vary however, as the base rate the tracker mortgage is based off can go up or down, which means your interest rate can also go up or down.
Capped rate mortgages
Capped rate mortgages are variable; however, they have a cap on how high the interest rate can rise. The interest rates on capped rate mortgages are typically higher than tracker mortgages but they aren’t subject to change.
Flexible mortgages
Flexible mortgages offer you the flexibility to be able to overpay or under pay on your monthly repayments. However, because of this, the interest rates are usually higher.
Offset mortgages
An offset mortgage is a type of flexible mortgage that allows you to pay off larger sums in order to pay less interest. With an offset mortgage, you can link a current or savings account with your lender, which is then used to make reductions on the amount of interest you are charged.
How much deposit do you need for a mortgage?
The exact amount needed for a deposit can vary depending on what is offered by the lenders. Usually, lenders ask for at deposit of at least 5% of a property’s value, however they usually ask for 10% or 15%. Deposits usually always work in brackets of 5%, so for example, if you have 8% of a property value to put down, you will still only qualify for the 5% deposit plan so you are better off saving up for 10% to move into that bracket.
Let’s take a look at an example of how much deposit you would need if you wanted to purchase a property with a value of £150,000:
- 5% Deposit – £7,500
- 10% Deposit – £15,000
- 15% Deposit – £22,500
Understanding Loan To Value (LTV)
Loan to Value (LTV) is the lenders way of figuring out how much money they need to lend you to cover the cost of the property. The LTV will be the opposite of your deposit percentage. For example, if you put down a 10% deposit, your LTV will be 90%
What is the minimum deposit I need for a house in the UK?
The minimum deposit required is usually 5% of the property value, however putting down a lower deposit will mean you have to pay back your loan at a higher interest rate.
Although they are very rare, it is also possible to get a 100% mortgage with 0 deposit. The only form of 100% mortgages currently available are guarantor mortgages, which require a family member who already owns their own home to put their name on your mortgage. By doing this, they are putting their own property or savings at risk if you miss your mortgage repayments.
Is it worth saving a bigger deposit?
If it is possible for you to save a bigger deposit, then the answer is almost always yes. There are many benefits to saving up a bigger deposit which include some of the following:
- Better Mortgage Deals – The bigger deposit that you put down, the lower your interest rate will be. If you put down a larger deposit, it is less risky for the mortgage lender so they will offer you a lower interest rate.
- Cheaper Monthly Repayments – If you put down a bigger initial deposit, you will have smaller monthly repayments as the loan you have taken out will be smaller.
- Bigger Buying Budget – If you are able to save up a bigger deposit, it will open you up to being able to purchase a more valuable property. It is worth noting that lenders will typically offer you a mortgage loan worth four and a half times your annual salary. If the loan doesn’t cover the cost of the property, then having a bigger deposit can make up the difference.
- Improved Chance of Being Accepted – Lenders will always conduct a background credit check on you and make a judgement whether you will be able to afford the repayment plan should you be offered a loan. If you put down a bigger deposit, the repayment amounts will be lower so there is more of a chance lenders will agree you are going to be able to make the monthly repayments.
