Mortgages with Low Deposit
With house prices on the rise and the market getting more and more mortgage lenders lenders are offering increasing numbers of loans with low up front deposit costs.
Being able to take out a mortgage with very little deposit, or a low loan-to-value ratio, can be invaluable for those struggling to come up with enough cash up front. We’ll explain the different types of low deposit mortgage available and what you should be wary of when picking between them.
In this guide:
- 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 and 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 high deposit.
Loans with lower LTV ratios are generally cheaper overall, not just because less is being borrowed, but also because lenders charge lower interest rates on lower LTV loans, reflecting the reduced risk of the loan being defaulted on.
If you want to pay a smaller upfront deposit on your mortgage, be prepared to pay more interest.
You should also note that if you do want a high LTV mortgage, you’ll need a good credit rating as the lenders will want proof that you can keep up with 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, through one of two ways, essentially allows to buyer to take out a mortgage to purchase a property with a deposit of only 5% of the property value. There are two aspects to help to buy:
The first involves an equity loan being provided by the government to the potential homeowner to the sum of 20% of the overall property value. This means that the buyer only needs to come up with 5% of the value as a deposit in order 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, no money is loaned out but rather the government will guarantee the lender 15% of the mortgage value, so that they can offer the customer a loan with an LTV of 95%, but risking the same amount as if they offered one with 80%.
Help to buy is only available to certain people in certain 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 will allow those benefiting from the right to buy scheme to use the discounted capital as an effective deposit, allowing the buyer to take out a mortgage without paying anything up front at all.
Some lenders will allow you to use borrowed money to pay for your deposit, say from a credit card or other kind of loan. You may have to look around to find a lender willing to offer you an unsecured loan for this purpose but they certainly do exist.
This option is mainly best for those in a particular hurry to buy a property quickly say by paying for the deposit on a 0% credit card with a large limit and then paying that off ideally before the interest starts getting charged.