How much money do you need for a down payment on a house in the UK? Read more to find out
Buying a home in the UK can be a financial feat in itself. With home prices being what they are, the money you must save for a down payment on a house is substantial—and out of reach for many.
However, there are UK government schemes designed to help first-time home buyers climb onto the property ladder.
Here is everything you need to know about making a down payment on a house in the UK. For the mortgage professional audience which typically comes to our website, this can be a good article to pass on to your clients who are just starting their path to homeownership in the UK.
What is a down payment on a house?
A down payment is the amount of money you pay upfront when you buy a home. The down payment is usually combined with the mortgage loan to pay for the total price of the property. Aside from your down payment amount, your credit history, credit score, total debt, and annual income determine the size of the home loan you may qualify for.
In the UK, if you want to purchase a property, you are likely going to need to make a substantial down payment on a house. Typically, the minimum down payment on a home is about 10% of the property’s value. Making a deposit of 15% or more, however, will give you a better chance to secure the best mortgage rates.
Since the COVID-19 pandemic, more and more lenders are requiring that 15% down payment out of economic uncertainty, which in turn is causing home prices to decrease. For instance, as of May 2020, first-time home buyers in London have had to make down payments of more than £70,000. Luckily for home buyers in other parts of the UK, the average down payment has been significantly lower due to lower home prices.
While making a 10% down payment on a house may seem unachievable, there are government-backed mortgage schemes that are designed to help buyers in the UK with 5% down payments climb onto the property ladder.
What is a good down payment on a first home?
A good deposit for a first home in the UK is 20%. When you make a mortgage deposit that high, you are viewed as less of a risk to lenders, who in turn are likely to offer you better mortgage rates and conditions. For this reason, the recommended minimum deposit for a home in the UK is 20% of the price of the property. This means that if your home is £250,000, you will make a deposit of £50,000.
Remember: mortgages with the lowest interest rates are available only when you make a large deposit. In other words, a 20% deposit is more likely to get you a mortgage with a lower interest rate than if you made a deposit of just 10%.
Another thing you should keep in mind is that a deposit of 15% and 17% only give you access to the same mortgage deals. There are no small steps. The only way to secure a better deal is by going up a full 5%, from 15% to 20%. Every time you increase your deposit by 5%—10%, 15%, 20%, and so on—you open better deals for yourself.
Use our free Mortgage calculator if you need help determining what sort of down payment you need to make.
The benefits of a larger down payment on a house
With home prices in the UK being what they are, a 5% down payment on a house alone can be a pretty penny. However, if you can secure more than 5%, many advantages will become available to you. Not only will you have more mortgage options to choose from, but you will also be able to take out a smaller loan, which also means you will be on the hook for smaller monthly repayments.
If you can decrease your loan-to-value ratio—i.e., the percentage of the property value that is mortgaged—the cheaper your mortgage rate will be. Not only that, but if you make a larger deposit, you will have a greater chance of being accepted. The reason is that lenders typically conduct affordability checks, based on your income and your expenditures, to determine how reliable you will be as a borrower.
Additionally, the largest loans offered by most lenders in the UK is roughly four times the salary of the borrower. Therefore, if your salary is relatively low, you may not be able to borrow enough—meaning you will have to make a bigger deposit to make up the property’s value.
Do first time buyers need a deposit?
A first-time home buyer in the UK is defined as someone who is purchasing their only or main residence, and who has never owned a freehold or possess a leasehold interest in a residential property here or abroad.
If you are a first-time home buyer, you will need to save for a deposit of 5% or more of the purchase price of the property. The rest of the money you will need to borrow in the form of a mortgage from a lender like a building society or a bank. That loan is secured against the value of the property until you pay it off in full.
Government schemes for first-time buyers
While saving for a substantial deposit may seem daunting, there are government schemes in the UK to help first-time buyers climb onto the property ladder. Let’s look at two to see if you qualify for either of these government schemes:
- Help-to-buy
- Shared ownership
Here is a closer look at each:
Help-to-buy
The help-to-buy government scheme helps first-time home buyers with just a 5% deposit by providing an equity loan. In this case, the UK government will loan you 20% of the value of the property, which means you will only need a 5% cash deposit and a 75% mortgage to make up the remainder. That means that you will have five years before you must begin repaying the 20% loan.
If you live in Great London, you can borrow as much as 40% of the value of the home. This higher percentage reflects the higher costs of homes in the capital city. Using this scheme in London, you can buy a home with a value as high as £600,000.
It should be noted that this government scheme ends on March 31st, 2023. If you want to use the help to buy scheme, you need to get your down payment on your house ready and the property in your possession before March 31st, 2023.
Shared ownership
The shared ownership scheme in the UK is designed for first-time home buyers and is a mix between renting and buying a home. With the shared ownership scheme, you own a share of the house and pay rent on the remaining share, often at a reduced rate.
Since the home buyer only needs a mortgage for a share of the home, the amount needed for a deposit is considerably lower than it would be when buying the home outright. Later, the home buyer will have the chance to buy a bigger share of the property.
Read more: Home loans for first time buyers in the UK
How much deposit do I need for a £300,000 house in the UK?
For a £300,000 house in the UK, you will likely need a minimum deposit of £15,000. The deposit you will need to pay in order to secure your mortgage is a percentage of the property’s value. In the UK, this is usually between 5% and 20%.
When determining your deposit, it is important to understand that your mortgage loan will also accrue interest. This means that home buyers who make a deposit of more than 5% will have a more favourable selection of mortgage loans available to them. The general rule is that the higher the deposit, the lower the interest.
Can I buy a house with a £5,000 deposit in the UK?
In the Spring Budget 2021, the UK government announced its 95% mortgage guarantee scheme, which enabled home buyers the chance to secure mortgages with a deposit of just 5%. Under the scheme, the government would underwrite 95% mortgages. The government 95% mortgage guarantee scheme is available to all home buyers in the UK, and not just first-time home buyers, since 2021 on properties valued at £600,000.
Lenders like banks and building societies are encouraged to offer 95% mortgages based on the UK government guaranteeing outstanding loans, meaning that lenders have a guarantee in case you, the borrower, are unable to make your mortgage repayments each month.
If home prices drop and the property is worth less than the outstanding mortgage loan (which is also known as negative equity), lenders are also protected under this scheme. In that case, the government agrees to cover these risks, meaning lenders are more likely to approve you even if you have a small deposit.
Make a downpayment on your home in the UK
There are plenty of options for making a down payment on a house in the UK. If you are able, making a down payment of 20% has definite financial benefits. Generally, the higher the deposit, the less you will have to borrow. Before committing to a deposit, it is important to understand the possible long-term implications. Does it make sense for your financial goals? By considering both the short- and long-term, you will be able to enjoy your dream home—minus the stress.
As we have seen, there are many factors that can affect the down payment you put on your home. It can be a very tricky road to navigate, and we advise you to speak to the best mortgage professional in your area for assistance. They can help you see the bigger picture and walk you through your options.
Do you have experience with making a down payment on a house in the UK? Let us know in the comment section below.
