Mortgage Deposits

Mortgage Deposits Explained

Mortgage deposits are a key part of the home-buying process, influencing how much you can borrow, the interest rates available, and the type of lender willing to work with you. The minimum deposit required for a mortgage can be as low as 5% of the property’s purchase price.

The average deposit for first-time buyers is often over 15% of the property value, though this can vary regionally and nationally according to data from sources like Halifax. If you’re wondering what deposit do you need, it depends on the property price and lender requirements. The higher the property price, the larger the deposit required. Whether you’re buying your first home, investing in a buy-to-let property, or securing a commercial mortgage, understanding how deposits work and what lenders require is crucial.

In this article, we’ll cover how mortgage deposits work, how loan-to-value (LTV) affects your mortgage rates, rules and minimum deposit amounts, and the requirements for borrowers with bad credit. We’ll also discuss acceptable deposit sources, the proof required, and how specialist lenders can help.

How Mortgage Deposits Work

A mortgage deposit is the upfront amount you pay toward the purchase price of a property. The rest is funded through a mortgage provided by a lender. Deposits are usually paid to the seller when contracts are exchanged. The deposit is transferred on the exchange date, which is when contracts are formally exchanged between buyer and seller.

This payment is known as the exchange deposit and is a critical part of the process. During the purchase process, the buyer appoints a conveyancer to manage the funds for the deposit. The conveyancer is usually a solicitor and acts as the buyer’s legal representative.

The seller’s funds are handled by the seller’s conveyancer or the selling party’s legal representative, ensuring the secure transfer of money. Conveyancers generally manage the process of transferring funds and verifying details to prevent errors or fraud. For example:

• If you’re buying a £200,000 property with a £40,000 deposit, you’ll need a £160,000 mortgage.

The deposit size affects your loan-to-value (LTV) ratio, which impacts your mortgage terms, including interest rates and lender options. For instance, a 5% deposit on a £300,000 property would amount to £15,000.

What Is Loan-to-Value (LTV) and How Does It Affect Rates?

Definition of Loan-to-Value

The LTV ratio represents the percentage of the property value being borrowed as a mortgage. It is calculated as:

For example:

• Property Value: £200,000

• Deposit: £40,000

• Mortgage Amount: £160,000

• How LTV Affects Rates

The lower the LTV, the less risk for the lender, which generally results in:

• Lower Interest Rates: Lenders offer better rates at lower LTVs, such as 60% or 75%.

• More Options: Borrowers with larger deposits have access to a wider range of products.

Do You Always Need a Deposit for a Mortgage?

In most cases, lenders require a deposit to reduce their risk. However, there are exceptions:

• 100% Mortgages: Rare and typically require a guarantor. You can get a mortgage without a deposit through a 100% mortgage, which covers the full cost of the house.

• Guarantor Mortgages: These allow borrowing with little or no deposit, secured by a family member’s property.

• Government Schemes: Some schemes, like Shared Ownership, require smaller deposits. Shared ownership schemes allow you to buy a share of a property and pay rent on the rest, helping you get a foot on the property ladder.

Rules for Mortgage Deposits

Minimum Deposit Amounts

• Residential Mortgages: A minimum of 5% of the property value is standard.

• Buy-to-Let Mortgages: Typically, 25% but can range from 20% to 40%.

• Commercial Mortgages: Deposits range from 20% to 40%, depending on the property type and lender.

A deposit is typically around 10% of the total purchase price at the exchange of contracts, but might be negotiable. Eligibility criteria must be met for certain mortgage products, and exclusions and eligibility criteria apply to specific offers or accounts, so always check the requirements before applying.

Deposit Requirements for Borrowers with Bad Credit

Borrowers with bad credit often need larger deposits, typically ranging from 15% to 30%, as lenders view them as higher-risk applicants.

Acceptable Mortgage Deposit Sources

Lenders require deposits to come from legitimate and traceable sources, including:

1. Personal Savings: Funds from your bank account or ISA. Using a savings account is a common way to save for a deposit, and there are various savings tools available to help you set and manage your monthly savings goals.

2. Gifted Deposits: Gifts from family members, with a letter confirming it’s not a loan. It is normally fine for parents or family members to gift money for a mortgage deposit. Parents contribute or other family members can provide a financial gift for your deposit, but you must provide proper documentation to satisfy lender requirements.

3. Inheritance: Often accepted with supporting legal documentation.

4. Sale of Assets: Proceeds from selling items like a car or investments, with proof of sale.

5. Equity from Another Property: If you’re selling your current home.

6. Government Contributions: For example, from a Lifetime ISA, which offers a 25% bonus for saving up to £4,000 annually, or Help to Buy scheme.

7. Extra money from side income or other sources can also help boost your deposit savings, provided you can show where the funds came from.

Unacceptable Sources

• Personal loans intended for the deposit.

• Undeclared or illegal funds.

What Proof Is Required for Deposits?

Lenders need documentation to confirm your deposit’s origin and ensure compliance with anti-money laundering laws. Typical proofs include:

• Bank Statements: Showing how funds were saved or transferred.

• Gifted Deposit Letter: From the giver, confirming the deposit is a gift and not a loan. A gifted deposit usually requires a letter signed by the gifting party as a legal statement for mortgage lenders. A mortgage lender will expect you to prove that gifted money is a gift, without expectation of repayment.

• Solicitor’s Letter: For inheritance funds or equity from a property sale.

• Proof of Sale: For funds generated by selling assets.

• A legal representative may be required to verify the source of funds, especially for larger or more complex transactions.

Benefits of Large Mortgage Deposits

1. Lower Interest Rates: Larger deposits reduce the LTV, unlocking better mortgage rates.

2. Lower Monthly Payments: Borrowing less decreases your monthly repayment amount.

3. Increased Borrowing Power: A bigger deposit may help you secure a more expensive property.

4. Wider Lender Options: Many lenders are more willing to approve larger deposits.

Setting yourself a savings goal can make saving feel easier. You can cut back on your everyday expenses to save more money. Reducing bills can also help you save for a deposit faster. Moving back in with parents can help save money for a deposit. Making small changes to everyday spending can add up over time

Mortgage Deposit Thresholds

Lenders typically operate within specific LTV brackets. The most common thresholds are:

• 95% LTV (5% Deposit): Minimum deposit for first-time buyers.

• 90% LTV (10% Deposit): Offers slightly better rates than 95%.

• 75% LTV (25% Deposit): Common for buy-to-let and bad credit applicants.

• 60% LTV (40% Deposit): Offers the best mortgage rates.

Buy-to-Let Mortgage Deposit Requirements

Buy-to-let mortgages typically require larger deposits than residential mortgages:

• Standard Deposit: 25% of the property value.

• Higher Deposits: Some lenders may require up to 40%, especially for high-value properties or borrowers with bad credit.

• Rental Coverage: Lenders also assess rental income, which typically needs to cover 125% to 145% of the mortgage payment.

When purchasing a property or moving house, safety measures should be taken to avoid scams related to deposit transfers.

Commercial Mortgage Deposits

Commercial mortgages often require larger deposits due to the higher risk associated with business properties.

• Trading Businesses: Deposits usually range from 20% to 30%.

• Investment Properties: Deposits can go up to 40%.

Factors like business profitability, property type, and credit history play a significant role in determining deposit requirements.

Conclusion

A mortgage deposit is a critical factor in securing the right mortgage. It determines your LTV, influences the interest rate, and affects your eligibility for certain products. By understanding deposit requirements, acceptable sources, and how to provide proof, you can prepare effectively for the home-buying process.

Whether you’re a first-time buyer, landlord, or business owner seeking a commercial mortgage, working with a mortgage broker can help you navigate deposit rules and find the best lenders for your needs, even if you have bad credit.

The First Homes scheme gives first-time buyers a discount of 30-50% on new builds. This scheme is specifically available to first-time buyers in England. Some mortgage providers offer joint mortgages to groups of up to four people, taking the income of the two highest earners into account.

When transferring substantial sums or substantial sums of money during property transactions, always verify the details with your legal representative or conveyancer before you transfer money. This helps protect you from scams and ensures your funds are handled securely.

Get help from an experienced mortgage broker.

You can speak to one of our specialist mortgage brokers who would be able to guide you through the process. They will advise if there is a lender available and the maximum loan amount based on your circumstances. We are a whole of market mortgage brokerage with access to all lenders. Call us on 01332 470400 or complete the form with your details for us to give you a call back.

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