Mortgage Guides

How big a deposit do I need to get a mortgage in 2011?

Writes Hazel Cottrell hazel@consumerchoices.co.uk

Updated: Thursday 10 March, 2011

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The size of your deposit is a crucial factor when it comes to getting a decent mortgage in the current market. But how big does it need to be?

Whether you are a first-time buyer or are looking to remortgage, the size of your deposit (or the amount of equity you have in your home) will have a significant effect of the type of mortgage you will be able to get.

Generally, the bigger deposit/more equity you have, the better deal you will be able to get, but just how much do you need to save to get a mortgage?

In this guide we answer that question as well as look at why things have changed so dramatically over the last few years. We also provide top tips on how to build up your deposit.

How big a deposit do I need to get a decent mortgage?

Since the onset of the financial crisis, mortgage providers have been reeling in their credit criteria and their prudence has made it difficult for first-time buyers to make that first step on the ladder.

Even just to secure a mortgage you will need at least a 5-10% deposit and to be eligible for the best deals you will need as much as 40%.

The following tables show the average interest rates currently on offer for different deposit sizes, as well as the number of deals available:

Deposit size	Number of deals available
5%	25
10%	202
15%	522
20%	376
25%	821
40%	268

Average interest rates

Average 2 year fixed-rate - 90% LTV	6.10%
Average 2 year fixed-rate - 75% LTV	4.56%
Average 2 year fixed-rate - 60% LTV	4.49%

(Tables courtesy of Moneyfacts, data correct as of 1 March 2011)

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Why do lenders want higher deposits now?

Before the credit crunch began, you could get 100% mortgages and even as much as 125% loan-to-value (LTV) which meant you didn’t need a deposit at all to get a mortgage. In the case of 125% mortgages you could even borrow extra cash to cover stamp duty, fees and other moving costs.

The mortgage market was very competitive and the average deal was around 90-95%, but a lot has changed since then. Since the beginning of 2008, lenders have been tightening their lending criteria, withdrawing these products from the market and asking for increasingly large deposits from borrowers.

There are two main reasons that banks want higher deposits now:

1. Negative equity

Prior to the credit crunch there was a boom in the property market. House prices were climbing at an impressive rate and it appeared that they would continue to do so. Property looked like a safe investment and so banks were happy to lend.

However, house prices have fallen around 11.5% from their peak in January 2008 to January 2011, according to figures from the Land Registry (www.landregistry.gov.uk). This has taken the average house price from £184,439 to £163,177.

This has left many people in what is termed “negative equity”. Basically this means their outstanding mortgage is greater than the value of their house. For example, someone may have bought their house for £100,000 three years ago and taken out a 100% mortgage. But given falling house prices, their house may only now be worth around £89,000.

This situation is no problem if the borrower plans to stay in the house for a long time, as eventually house prices will start to climb again. However, if they want to move they are in a difficult situation.

Furthermore, if they cannot keep up with their repayments and the bank has to repossess their house, problems arise. Selling the house would not cover the cost of the mortgage so the borrower would still owe the bank a substantial sum.

This is one of the main reasons why lenders are now demanding bigger deposits. By demanding borrowers have larger deposits as a proportion of the value of the house, the borrower is less likely to fall into negative equity.

2. Responsible lending

Banks are becoming more careful about who they lend to and how much they lend. Previously they were happy to hand out 100% mortgages for amounts that were at great multiples of a borrowers’ income, but following changes in the economy including increased job losses, many borrowers have become unable to afford their repayments.

Banks who previously lent to the sub-prime market have been left with toxic debts and now they whole market has seen the need to change lending practices. This is linked to avoiding negative equity but is not just for the benefit of the borrower.

Following the failure of many banks to successfully ensure borrowers could meet repayments, there has been a great pressure for banks to start lending more responsibly. In response to this, banks are now lending to low-risk customers (and so demanding bigger deposits) to make their books look better.

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How to build up your deposit

If you are hoping to buy your first house or looking to remortgage to a better deal, then the bigger deposit you can build up the better. If you are struggling to save, try one or more of our top tips:

Use your other savings - If you have savings separate from your deposit then it may make sense to use these to boost your deposit. The money you will save by getting a better interest rate on your mortgage is likely to outweigh any returns you are currently getting on cash in a savings account. However, you shouldn’t lock all your cash in your house. You should have enough cash in an easy access account to provide for yourself and any dependents for three to six months.
Get better returns – While you are saving up for your deposit, make sure your cash is earning as much interest as possible. Savings interest rates are not great at the moment but there are always accounts that beat the rest. Switch your money to a best buy savings account to grow your cash faster.
Spend less – The simplest way to build up your savings is to spend less and stash the cash you save. This doesn’t always have to mean making big sacrifices but cutting back in the short-term will help you achieve your long-term goal of owning your own house. Download our complete guide to saving money (without giving up the things you love!) and discover tips and tricks to help you save money in every area of your life.
Ask for help – Many people these days are unable to put down a deposit without help from their parents. If you feel comfortable asking your family or even friends for help then this is an option, but should always agree in advance how you will pay back the loan and look carefully about whether you will be able to repay it in a reasonable time. If you agree to pay interest on this loan, there may also be tax implications to consider.
Get a loan – Getting an unsecured loan to boost your deposit could get you a better mortgage deal but you have to do the sums carefully to work out whether it would be cheaper than getting a mortgage without it. Plus, you need to be sure that you will be able to meet the loan repayments on top of your mortgage repayments.
Speak to an expert – If you are struggling to build up a large deposit, there may be specific options you can consider, such as part-ownership mortgages, graduate mortgages, guarantor mortgages and government-assisted mortgages. For advice tailored to your personal circumstances, you should consult an independent mortgage adviser.

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