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How much deposit do I need to buy a house? What are your options?

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Posted on: January 8th, 2018 by Vivo_Team

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Finding a large sum of money for a house deposit can seem like a daunting task for potential homebuyers. Even after years of careful budgeting, the housing market is always changing which makes saving enough for a deposit even more difficult. Over the past decade conditions for those looking to purchase a property have been tough, particularly for first-time buyers, with the number of 25-34-year-olds owning a home falling from 59% to 38% over the past 13 years. However, UK house price rises have been slowing down, with reports of properties in London even losing value. This is positive news for those looking to buy a house, considering that the deposit needed for a mortgage is relative to the property’s value. So you might be asking yourself how much deposit do I need to buy a home?

How much is a deposit for a house?

When buying a property, most people have to secure a mortgage through a bank or building society. Whilst it’s possible to put down a deposit that’s 5% of the value of the property, you should look to put down 30% or more to secure the most competitive mortgage rate. To most first time buyers 30% will seem unrealistic and is not essential; in a survey by Which? the average deposit for first-time buyers was 17% of the property’s value. This means, if you were looking to buy a property that costs £300,000, you would need to save £51,000 for your deposit – which is still a considerable amount.

Location matters

A deposit required for any London homebuyers is likely to be much larger than most other parts of the UK due to the increased house prices in the Capital. Therefore, to get a clearer view on the deposit size you might require, look into the prices that similar houses were sold for in the area you’re looking buy, then find a percentage value of this price for a deposit that suits your needs and financial capabilities. If you’re looking for information on house prices in certain locations, Zoopla is an online property information portal that detail average house price values depending on location.

Benefits of a larger deposit

Those saving for a deposit may think that the sooner they’re on the property ladder the better, and look for a mortgage at the lower end of the scale (5-15%). However, this, in turn, can have a detrimental effect as your repayment rates reflect your deposit size. If your deposit size is larger, it helps to build confidence with the lender which generally results in more favourable rates. Moreover, having a more substantial deposit can help avoid the risk of your application falling through and your property experiencing negative equity.

Mortgages

The other side of property buying concerns getting a mortgage. A mortgage is essentially a property-specific loan given by a financial provider that allows you to buy a house with the remaining % not covered by your deposit. There’s a wide range of options available to those applying for a mortgage.

The process: what to expect

With hundreds of thousands of pounds potentially being borrowed, it’s no surprise that the application process for a mortgage is quite comprehensive. When you’re trying to secure a mortgage your financial and social situation will be scrutinised by the bank or building society that you’re applying to. Questions may vary from whether you plan to start a family to whether you gamble and how much money you spend socialising. This is to make sure that you’re capable of paying back the money that’s being lent. On top of this, there are various fees to consider such as the arrangement fee and stamp duty (unless you’re a first-time buyer).

What kind of mortgage is right for you?

There are also different types of mortgages that are available, the two main ones being a fixed rate mortgage and a variable rate mortgage. A fixed rate mortgage means that the interest you pay over time stays at a fixed level. It has the clear benefit of being predictable, providing more financial stability. A variable rate mortgage means that the interest rate you pay is subject to change. This option comes with more risk, however, the rate can go either way and over time you may be paying less than you were previously. Which rate you choose will depend on how comfortable you are with risk and whether you can cope financially if your variable rate mortgage becomes more expensive over time.

Should you use a mortgage broker?

If the process of selecting and applying for a mortgage seems challenging or unnecessary in your current situation, there is the option of hiring a mortgage broker. Although you’ll incur more costs through the process of acquiring a mortgage, there are considerable benefits. Mortgage brokers are liable to put your best interests first, this means that their advice should protect you in the long term. If you go straight to a high street mortgage lender they’re not obligated to give you the most suitable deal which could put you at a serious disadvantage in terms of unfavourable rates.

Help to buy schemes

Although it may seem like a difficult task to raise the money for a mortgage, the government offer help to buy schemes that help those with smaller deposits buy a house. New buyers with deposits from 5% to 20% can benefit from special mortgages or interest-free help to buy equity loans. These schemes have made a substantial difference to those looking to get on the property ladder who previously would have found it a lot tougher. Understanding the options available to you through these schemes could be the difference between securing the right property or not.

We hope it’s now a little clearer regarding how house deposits work and what options are available. Thinking about the long-term effects of the size of your deposit can have a massive effect over time, saving you a lot of money. Moreover, understanding the support that the government can provide can make the idea of buying your dream house more realistic. Although saving enough for a deposit may seem like an uphill struggle, understanding which path to take can put you in good stead for the future.

Are you looking to sell your house before buying a new property? Vivo are the UK’s best rated fast property buyer on Trustpilot and can buy your property in 3 simple steps. You can find more information about our services on our How it works page or visit our blog.

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