If you are saving up to buy a house you will know that getting on to the property ladder is not easy.
One of the main challenges is getting a deposit together.
In these situations a low deposit mortgage may be worth considering. It allows you to buy a home with a smaller deposit, so you don’t need to save for so long.
In this guide we run through what a low deposit mortgage it, how they work and where you can get one.
What is a low deposit mortgage?
A low-deposit mortgage allows you to borrow around 90-95% of the property’s value, so you only need a small deposit.
They can be suitable for first time buyers, home movers and those who need to remortgage.
There was a time when you were able to borrow all of the purchase price, with a 100% mortgage, but these are too risky for lenders now.
(This is actually how I bought my first house)
If you can manage a 10% deposit then there will be far more choice than for a 5% deposit.
What’s the lowest deposit you can have?
The lowest deposit needed for a UK mortgage is 5%.
The percentage is calculated against the property purchase price. So if you are buying a home for £400,000, a 5% deposit equates to £20,000.
You would then need to apply for a 95% mortgage of £380,000.
Even though 5% is the minimum deposit, not all lenders will be happy to take this much risk.
Many will only accept a 10% deposit, towards a 90% LTV mortgage.
In 2021 the UK government introduced a Mortgage Guarantee Scheme, aimed at lenders. The scheme provided a way for lenders to offer 95% mortgage but at a lower risk. This initiative has certainly helped boost the number of deals available, but it will have a limited life.
Other costs
Understandably, most people looking to buy a home will concentrate on saving up for the deposit.
It is important to be aware of the other costs:
- Solicitors fees
- Survey fees
- Stamp Duty
- Mortgage fees
- Broker fees
- Removal costs
You will find more useful information in our Guide to Mortgage Fees
Mortgage eligibility
To be eligible for a low-deposit mortgage, you’ll have to meet the lender’s criteria, as well as having the cash deposit needed.
Eligibility rules apply to all mortgages, whether you have a low deposit or a high deposit.
Credit status
All borrowers will be credit checked by the lender. Some lenders are OK with a less than perfect credit file, while others need it to be squeaky clean. It’s a good idea to check your credit report before you apply.
Applying for a low deposit mortgage
The first step will be to contact an independent mortgage broker who has experience of arranging mortgages with low deposits. (we can help with this)
Not only will this save you tons of time, it also means you will get the best deal, as brokers have access to over 100 mortgage lenders.
Once they have found a suitable lender it’s normally a good idea to apply for a decision in principle, or DIP. It’s like a mini application.
If this goes well then you can proceed to make the full application.
Your broker will handle the paperwork and negotiations and will be on hand to deal with any queries.
You want avoid making multiple applications to different lenders, as this shows on your credit report and will affect your credit score.
Pros and cons
The pros
The most obvious advantages is that it makes buying a home that much easier, and you can achieve homeownership in less time.
The cons
These are mainly:
Choice: Or lack of choice. There won’t be as many deals to choose from at 95% LTV.
Cost: The rates you will pay are likely to be higher as lenders deem lower deposit mortgages as higher risk.
Negative equity: This is where you owe more on your mortgage than the property is worth. With a 95% mortgage it only takes a downward blip to move into negative equity.
Is a 5% deposit too low?
If you can muster 10%, or more, as a cash deposit then you will have access to a greater number of deals, and lower interest rates.
This just reflects the risk that the lender is taking. The higher the deposit from you, the lower the risk to them.
That said, a 5% deposit is sufficient for you to secure a 95% mortgage so that you have a place to call home.
Guide to Deposits
Our guide explains what a mortgage deposit is and how it affects your mortgage choices.
Applying for a mortgage
We explain what happens at each step, including what documents are needed and how a broker can help.
Can you get a mortgage without a deposit?
A mortgage without a deposit is a 100% mortgage.
While these used to be available (before the financial crash) they don’t fit the ‘lending responsibility’ remit.
But all is not lost.
There are other ways of buying a home without the need for a personal deposit.
These could involve:
You might like to read this article: How to get a mortgage with no deposit
Gifted Deposits
Getting a deposit together is one of the biggest hurdles when buying a home. More and more first-time buyers are receiving help from family members in the form of a gifted deposit.
What is a gifted deposit?
A gifted deposit is money given to you by someone else (usually a family member) to use as your mortgage deposit.
The key point is that it’s a genuine gift – not a loan that needs to be repaid.
Who can provide a gifted deposit?
Most lenders accept gifted deposits from immediate family members such as parents, step-parents, grandparents, siblings, aunts, uncles and legal guardians.
However, some lenders have stricter rules about who can provide the gift, so it’s worth checking this early on.
You’ll need a gifted deposit letter stating the amount and confirming it’s a gift, not a loan. The person giving the gift will need to provide proof of where the money came from, such as bank statements, along with their ID and sometimes proof of their address.
How a broker can help
Searching for a mortgage when you have a small deposit is going to be tricky, and time consuming.
While some lenders might say they offer 95% mortgages, the devil is in the detail. And they may have conditions or restrictions that effectively exclude you from applying.
By using a whole of market mortgage broker, they can do all of this for you.
Searching for deals and reading the small print. Calling the lenders to double check lending criteria.
Brokers have access to over 100 mortgage lenders, both the well-known high street banks and the specialist companies.
This means you benefit from having the widest possible choice of lenders and mortgage deals.
Respect Mortgages offers a free broker matching service. We can introduce you to an independent mortgage expert who knows about low deposit mortgages.
