Mortgage Guides

Buying a house: Do I need a 25% deposit?

By Martin Fagan news@consumerchoices.co.uk

To get a good deal on a mortgage, you’ll require a bigger deposit than you did pre-credit crunch, but there are signs banks are relaxing their terms. So how much do you really need?

In the heady days of the Noughties house price boom - before the banking crisis of August 2007 - lenders were falling over themselves to sign people up for mortgages, blithely ignoring the lending criteria they’d observed religiously for decades: lending no more than three times income and seeking a deposit of at least 5%, but preferably more.

When the credit crunch hit, the folly of lenders advancing mortgages to people without deposits, bad credit ratings and at crazy multiples of small incomes became painfully apparent.

In April 2008, Moneyfacts, the UK's leading independent provider of personal finance information, reported every 100% mortgage on the market had disappeared overnight.

For almost three years since those dark days, Brits looking to get a foot on the property ladder have been required by lenders to stump up deposits of up to 30%. So, if the average UK house price is £165,000, first-time buyers need to scrape together deposits of £49,500 - meaning for many, the overwhelming obstacle to homeownership remains the deposit.

How much deposit do I need now?

There are signs lenders are relaxing their lending criteria now, and first-time buyers are finding themselves in a completely different landscape to those who scrambled onto the bottom rung of the property ladder a couple of years ago.

In February 2011, Moneyfacts reported that homebuyers without large deposits now appeared to have more choice of mortgages than at any time in the past two years, and the number of deals at 80%, 85% and 90% had doubled over the last 12 months.

Then in March 2011, Skipton Building Society launched a fixed-rate mortgage requiring only a 5% deposit (95% LTV) at a rate of 6.49% until 31 May 2013, with a fee of £195.

In recent months, Moneyfacts found lenders have been gradually reintroducing higher loan-to-value mortgages to the market, which means buyers require smaller deposits.

According to Moneyfacts, the total number of mortgage deals available at 90% LTV, which require a 10% deposit, currently stands at 214, up from 144 in February 2010. And for those with at least a 15% deposit (85% LTV), there are 560 deals now available compared with 310 a year ago.

But those with a 20% deposit get the best choice of deals, as there are now more than 1,000 different mortgage deals on the market for these borrowers, compared to just 523 in December 2010.

How do I get a low deposit deal?

Even though many lenders are still reluctant to enter the 90% market, deals requiring smaller deposits are out there - so how do you find one?

High Street lenders’ windows may be full of deals for those with smaller deposits, but only a limited number of such mortgages are likely to be approved as, in the face of swingeing public sector cuts, many lenders remain fearful of rising unemployment, especially in Northern England and Wales.

Lenders are also reluctant to risk having too many first-time buyers with low deposits on their books, in case house prices fall and the properties are worth less than the mortgages secured on them.

Although lenders are willing to advance money to borrowers with smaller deposits, the brutal truth is the more money you have to put down as a deposit, the easier it will be to get the mortgage deal you want.

But doom and gloom aside, these deals are out there and you can shorten the odds of bagging one in your favour by being disciplined and realistic. Following the top five tips below will certainly help get your foot closer to the first rung on the property ladder:

1. Check your credit rating - The amount you are able to borrow will depend on a number of financial circumstances, including your income, outgoings, size of your deposit - and your credit history. Many people are unaware they have a credit history; and many more don’t realise that a missed loan, mortgage or credit card payment, will show up on their credit history. The worse your credit history, the less likely you’ll be viewed as a trustworthy person to advance a mortgage, regardless of the size of your deposit.

If your credit rating is tarnished, all is not lost. You can take steps to fix it. Read our Top 10 tips to fix your credit rating.

2. Be vigilant - Remember, you’re not the only first-time buyer with a small deposit looking for a loan, so demand for low deposit mortgages will be fierce. Also, lenders offering such deals do so for a short period of time: they’ll allocate a chunk of money to the product and when this is all shared out to applicants, the deal will close.

If your deposit is small and you’re serious about getting a low deposit mortgage, you have to scan the market every day for signs of new deals and if a deal is to your liking, you have to move fast to register an interest with the lender. Any delay will mean others jump the queue ahead of you.

3. If you don’t ask, you don’t get - Even if you scour the mortgage market every day, such is the breadth of deals available that some lenders won’t even bother with the expense of advertising them, relying instead on mailshots to their existing customer base or in-branch marketing. Most of the big mortgage lenders have freephone helplines for new borrower enquiries so it costs nothing to call them several times a week and ask if they’re about to launch a tranche of low-deposit mortgages you can apply for.

4. Local loans for local people - Building societies are run on behalf of their members (savers and borrowers) rather than shareholders, so their mortgage deals tend to be more competitive than clearing banks. But some societies serve a tightly defined local area and will only lend to people who are resident - or looking to buy - in specified postcodes.

Often these societies offer mortgages to local people, especially first-time buyers, on preferential terms. For example, in mid-April, the Monmouthshire Building Society offered five-year fixed-rate mortgages to buyers with deposits of as low as 5%. The catch was: you have to live in certain postcodes in South Wales (but they include Cardiff and Swansea).

Small local societies will also look at your application with greater care and view you more as an individual and will almost certainly require you to attend an interview in branch to assess your suitability as a borrower. This is good, as any past problems in your credit rating can be explained to a human rather than it being the cause of a computerised rejection.

5. Speak to a mortgage broker - Choose an independent mortgage broker that can search the whole of the market and get the most suitable home loan for your needs. Avoid brokers who are tied to one specific lender and can only recommend products from that particular bank or building society.

Mortgage brokers work either on fees or commission. By law, all authorised mortgage brokers must explain their charging policy on your first meeting and if you pay by commission, the mortgage broker has to reveal what it is.