Low Deposit Mortgages

In Brief

Buying a house is an expensive business, but it’s possible to buy with a relatively small amount of savings. It can be expensive and risky, but you may decide it’s worth it in order to get on the property ladder.

In this guide we explain everything you need to know about buying with a low deposit, including why banks will charge you more, why you could be at risk of negative equity, and how to find the cheapest deal.

In this guide…

What is a low deposit mortgage?

A low-deposit mortgage is designed for people who only have a relatively small amount of money but want to get on the housing ladder. If you only have savings worth 10% or 15% of the house you wish to buy, a low-deposit mortgage may be the way you can buy a home.

These days lenders insist on a deposit worth 10% of a property’s value as the bare minimum when giving out a mortgage.

Government schemes to help first time buyers

It is possible to buy with a 5% deposit but only via one of the Government’s affordable home ownership schemes. For example, the Help to Buy scheme allows you to buy a new-build home under £600,000 with only a 5% deposit. The Government provides an equity loan worth 20% of the property and a mortgage lender provides the remaining 75%.

However, Help to Buy is currently only available on new-build homes, which can quickly to lose their value once you move in.

Buying with such a small deposit however could put you at risk of negative equity – when your mortgage plus loan is worth more than the value of your home. This may not be a problem if you’re planning to live in the home for many years, but it’s worth bearing in mind.

Low deposit mortgages: what’s the catch?

Low deposit mortgages have higher interest rates than other mortgages which require bigger deposits. That’s because If you have a large deposit banks will lend to you are a lower rate because you are less of a risk because your large deposit protects the bank from house price falls – they stand less chance of repossessing a home worth less than what they lent.

However, the good news is that mortgage rates are low at the moment, meaning even low deposit mortgages are available under 5%. Historically this is still a pretty cheap deal.

The Golden Rule of mortgages

  • Be vigilant:The larger your deposit, the cheaper the interest rate will be.
    As a very rough guide, someone buying a £150,000 house with a 10% deposit might expect a mortgage rate of, say, 4%. But if they had a 25% deposit the mortgage rate might drop to 3%. Even better, a 40% deposit might qualify for a mortgage worth only 2%.

Could you save more for a deposit?

With house prices so high, saving just a 10% deposit can seem a daunting task for many people. With the average house price around £160,000, it means saving at least £16,000.

But if it’s possible to save more, you should. Every 5% of extra equity you can save will make your mortgage rate a bit cheaper.

Saving a 15% deposit instead of a 10% deposit is preferable because your monthly repayments will be cheaper, and you are less at risk from house price falls. Use a mortgage calculator to see how different mortgage rates would affect your monthly repayments.

What about negative equity?

WARNING

  • Negative equity occurs when someone buys a house with a small deposit, and then the house falls in value.It means the buyer is left with a mortgage worth MORE than the property itself.

This the biggest concern for those buying with small deposit.

Negative equity often makes headlines, but in fact ‘low equity’ of less than 10% is also a problem. It makes it impossible to move house, or switch to a cheaper mortgage rate, because all lenders insist you have equity worth at least 10% of a property’s value before they’ll give you another mortgage.

So if you buy a house with a 10% deposit and the house falls even slightly in value, it could mean you’re ‘trapped’ in that house until you pay off enough of your mortgage to get your equity levels back up to 10%.

Equity falls may not be a problem if you’re planning to stay in a house for a long time. But it’s something to bear in mind, especially if you’re buying a one bedroom flat that may not be big enough in a couple of years.


    Bear in mind that lenders will carry out even more stringent credit checks on low-deposit borrowers, because you are seen as higher risk. Read our guide on how to clean up your credit record before applying for a mortgage.

    As low-deposit mortgages are more expensive, it’s even more important to shop around for the best rate. Totally Money will search the market for you – just click on here.

How to choose the right low-deposit mortgage

As with any mortgage, you will need to decide if you want a fixed, tracker or discounted rate. Our guides explain everything you need to know about the difference between these types of deals.

Also, visit our mortgage rate prediction page. It shows what experts think might happen to interest rates, which may help you decide whether you want to fix or not.

Warning – check the SVR

  • It is especially important to check the lender’s standard variable rate (SVR) when choosing a low-deposit mortgage.
  • You will be automatically placed onto this when your fixed, tracker or discount deal ends, and SVRs may be much higher than your initial deal.
  • Normally you should shop around and remortgage onto a cheaper deal to avoid going on a SVR. But if your home has fallen in value, and you therefore have less than 10% equity, you may have no option but to stay on the SVR.
  • Use a mortgage calculator to see if you could afford repayments on the lender’s SVR.