The rush to get onto the housing ladder is more evident now than ever before. The government are encouraging this trend and lenders have also started to increase products tailored to those with low mortgage deposits to help first-time buyers.
Mortgage lenders and the government have a number of schemes designed for homebuyers who have low deposit amounts. With all this help on hand, getting a mortgage with a small deposit is perhaps easier now than ever before.
In this article, we’ll focus on how to get a mortgage with a low deposit. If you require tailored advice, then you can fill out the form below and an advisor will call you straight back to discuss your options.Enquire Now
Understanding Loan to Value (LTV)
It makes sense to first explain what LTV is. LTV is simply the Loan to Value of which your mortgage is. For instance, if you have a 5% deposit, then you’ll need a 95% LTV mortgage. If you have a 10% deposit, then you’ll need a 90% LTV mortgage and so on.
It’s important to understand LTV because it has a direct link to the mortgage rates you’ll be offered. High LTV mortgages such as 85% loan to value and above, tend to have higher rates when compared to low LTV mortgages, such as 75% and below. This is because lenders are taking a lot more risk when lending 95% of the property value in comparison with 75% of the property value. If the value of a property decreases, then lenders are left with little wiggle room and as a buyer, you could face being in negative equity.
Just to recap, getting a mortgage with a small deposit is possible, however the rates won’t be the most competitive. Using a larger deposit may give you more favourable rates. That being said, in almost all cases, purchasing makes more financial sense than renting, as your monthly payments will be going towards your own mortgage. In addition, some government schemes such as Help to Buy also offer incentives, which brings us on to our next point.
How small can my deposit be?
It’s possible to get a mortgage with a 5% deposit. Unless you’re using a government mortgage scheme, then the rates on offer will be high. In addition to high rates, lender arrangement fees will also pack a punch.
Remember, lenders base their financial decisions on risk. The higher the risk, the more a lender will look to recoup in the form of fees and interest rates. Government mortgage schemes work well with smaller deposits because homeowners are designed to reduce lender risk.
Using a government scheme to purchase a property
Government home buying schemes such as the Help to Buy scheme have proven successful in recent years. Many first-time buyers simply wouldn’t be homeowners if this scheme didn’t exist and that’s exactly why the scheme was created.
Help to buy allows buyers to purchase a property with deposits as little as 5%. There are currently two different Help to Buy schemes:
- Equity loan
- Help to Buy ISA
The equity loan is a loan given by the government to the homebuyer and is calculated at 20% of the property value. In addition to the 5% deposit, this then makes up a 25% deposit. This is great as you can then search for 75% LTV mortgages which often have great rates.
The Help to Buy ISA is designed to be a mechanism of saving. First-time buyers are able to save money into the scheme to receive a 25% savings boost from the government.
Can I borrow a deposit from a family member?
If you are struggling to save for a deposit and have family that can help, then you may want to consider using a gifted deposit. Lenders do entertain gifted deposits, but there are some guidelines on how to do this. You can’t technically ‘borrow’ a deposit from a family member, but it can be ‘gifted’.
Gifted deposits must be given and not loaned. Lenders will also need to see evidence of this in writing, signed by the giftor. As the deposit is a gift, the friend or family member has no interest in the property and it doesn’t constitute any rights of ownership.
The reason deposits must be gifted and not loaned is because lenders and all parties concerned know exactly where they stand. The last thing a lender wants is for the giftor to ask for their deposit back. This is why a signed document outlining the gift is crucial.
There are other options that allow family and even friends to help if you’re struggling to save a substantial deposit. Rather than gifting funds, family members are able to transfer funds into a bank account held by your lender.
Lenders usually require 10% of the overall property value to be deposited into a savings account. The incentive here is that the person helping you will get their money back after the initial mortgage term which is either three or five years. These types of mortgages are known as family mortgages. Lenders may even lend up to 100% of the property value so you won’t need a deposit.
Whilst the majority of lenders will insist that you save up for a deposit, it is possible to borrow your deposit in the form of an unsecured loan. If you do choose to use this route, then it’s important to apply to lenders that do accept mortgage deposits from unsecured loans.
Unsecured loans are generally used by investors who know that they can profit from buying and selling a property. Loans are then repaid before any interest is charged. This will only work on deals that offer 0% for a set period of time, such as credit facilities. First-time buyers can still use an unsecured loan, however the loan will need to be repaid. As there’s not an asset waiting to be sold, you will need to find a means of repaying the loan. In addition to this, you’ll need a favourable credit limit and clean credit history.
Brokers for low mortgage deposits
If you need a mortgage but feel as though your deposit may not be enough, don’t give up hope. Speak to a specialist today to see if you’re eligible for a mortgage.
Even if your deposit amount is deemed too small, our advisors can talk you through the exact amounts you need. Having a specialist on board can make all the difference in being accepted for a mortgage, so do get in touch.