Loan-to-value
The loan-to-value (LTV) on a mortgage is essentially the ratio between the amount borrowed and the overall value of the property, where the remainder is paid as a deposit up front.
For instance:
You want to buy a house worth £300,000.
You can afford a deposit of £60,000.
You will therefore need a mortgage worth £240,000 in order to purchase the property in question.
£240,000 is 80% of £300,000, so your LTV on this mortgage is 80%.
An LTV of 80% or lower is considered relatively low, whereas anything above 90% is considered high.
Remember: a low LTV means a larger deposit.
Loans with lower LTV ratios are generally cheaper, as lenders charge lower interest rates on lower LTV loans, reflecting the reduced risk of default.
If you want a smaller deposit on your mortgage, be prepared to pay more interest.
If you want a high LTV mortgage, you’ll need a good credit rating, as lenders will want proof that you can manage higher repayments.
Help to buy and other government schemes
There are various government schemes in place designed to help homebuyers take out mortgages and buy properties when they would otherwise be unable to afford to.
Help to Buy is a scheme that allows to buyer to take out a mortgage with only 5% deposit on the property value, through one of two methods. There are two aspects to Help to Buy:
The first aspect involves the government providing an equity loan of 20% of the property value to the potential homeowner. This means the buyer only needs a 5% deposit to qualify for a mortgage with an effective LTV of 75%.
The second aspect of Help to Buy is known as the mortgage guarantee. In this case, the government guarantees 15% of the mortgage value, allowing the lender to offer the customer a loan with an LTV of 95%, while taking on the same risk as with an 80% LTV.
Help to Buy is only available to eligible individuals in specific situations. For more information on this, including how to work out whether or not you qualify for the scheme, head over to our guide on Help to Buy.
Other government schemes that can help reduce the size of the deposit required with a mortgage include Right to Buy, which is designed to allow public sector tenants to buy their homes at a discount. Many mortgage lenders allow those benefiting from the Right to Buy scheme to use the discounted capital as a deposit, allowing the buyer to take out a mortgage without any upfront payment.
Using Unsecured Borrowing for a Deposit
Some lenders allow you to use borrowed money for your deposit, such as from a credit card or other loan. You may need to shop around to find a lender willing to offer an unsecured loan for this purpose, but they do exist.
This option is best for those in a hurry to buy a property quickly, such as by paying for the deposit with a 0% credit card with a large limit, then paying it off before the interest starts accumulating.
Compare low deposit mortgages
To find the best mortgages, regardless of the deposit size, visit our mortgage comparison page to explore great interest rates.