How to Buy with a Small Deposit
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, or move up, 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. Equally, if you already own a property but your equity is only worth 10% - 15% of the value of your home then you may need a low-deposit mortgage when it's time to remortgage. 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. You can find out more in our guide to alternative ownership schemes.
Low Deposit Mortgages: What’s the Catch?
These mortgages have higher interest rates than mortgages that require larger deposits. This is because there is more risk for the lender. As you've only put down a small deposit they have a smaller margin for house prices to fall before your house - the security that they can reclaim if you fail to repay - is worth less than you owe the bank. However, the good news is that mortgage rates are low at the moment, even low deposit mortgages are available for under 4%.
What About Negative Equity?
Negative equity often makes headlines, but in fact ‘low equity’ of less than 10% is also a problem. 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. 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.
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.