Getting on the property ladder might just be the biggest financial hurdle you’ll ever face. And with most lenders requiring an upfront payment of at least 10% (and up to 40%) of the property price, saving up for a deposit can be enough to defeat even the thriftiest among us. Recent stats suggest that nearly half of young people can’t afford to buy the cheapest home in their area, even with a 10% deposit.
Let’s do the maths: the average house price in the UK is now £227k. If you were required to pay 10% of that upfront, you’d need to have £22,700 in the bank. Saving up that amount of money, unless you inherit it from a generous relative or by some miracle win the lottery, is no mean feat. And if you’re trying to buy in London, where the average house will set you back a whopping £479k, well, you might as well start renting a cupboard for a bedroom in a bid to save up.
But, (and here’s the good news you’ve been waiting for) buying your first home with a smaller-than-average deposit isn’t impossible! In fact, it’s becoming increasingly popular for lenders to offer up the option as more and more young people face reduced purchasing power.
So how does a low-deposit mortgage work?
Before the financial crisis hit in 2008, banks and lenders would happily offer first-time buyers 100% mortgages. That’s right: the chance to get on the property ladder without a penny by way of deposit. But the uncertainty and risk meant they quickly put a stop to this, and started actually reviewing buyers’ affordability before handing them cash on a plate.
A decade on, and banks have done a 360. No, they’re not all offering up 100% mortgages again (some of them are). But they have decided that they’re keen to give first-time buyers the chance to own a home, which is why they’re offering mortgages for smaller deposits. So you could find a mortgage with a deposit of just 5% of the property price.
Which lenders offer mortgages with smaller deposits?
Here are some of the banks and lenders currently offering low-deposit mortgages:
- Lloyds Bank - ‘Lend a Hand’ mortgage
- HSBC - 5% deposit mortgage
- Santander - 5% deposit mortgage
- Aldermore - 5% deposit mortgage and ‘Family Guarantee Mortgage’
- NatWest - 5% deposit mortgage
- Nationwide - 5% deposit mortgage and Family Deposit Mortgage
- Monmouthshire Building Society - 5% deposit mortgage
- The Cambridge Building Society - low deposit mortgage
- Marsden Building Society - 5% deposit mortgage
- Hanley Building Society - 5% deposit mortgage
What are the risks?
As with everything that sounds too good to be true, there’s usually a catch.
You could be offered poor rates
Generally, the smaller your deposit, the worse the rate you’ll be offered on a mortgage. This is because the lender has to to give away more money, which makes you a riskier borrower. So putting down a deposit of, say, 5% means you could still get a perfectly decent mortgage, but you might be offered a higher fixed term interest rate due to your LTV (loan to value) being higher.
Having said that, the size of your deposit isn’t the only thing a lender will look at when you apply for a mortgage. Other factors, like your credit score, contribute to what you’re offered, as a lender will want to know you can keep up with repayments. So it’s really important to check your credit score before you apply. (If you haven’t already done this, sign up or log in to ClearScore to see your score for free!)
If it’s looking good, fantastic - this could boost your chances of being accepted. If your score could use some TLC, now’s your chance to improve it. Find out how to boost your credit score in our quick guide, or try our free Coaching plan.
Watch out for the fees
Just because you’re paying a smaller deposit doesn’t mean you’re exempt from paying fees. You might be asked to pay a Mortgage Indemnity Guarantee (MIG) fee by the lender if you have a small deposit. This is usually only the case if your loan to value ratio (LTV) is more than 75%, i.e. if you’re borrowing more than 75% of the value of your home. It’s an insurance policy that protects the lender in case you default on your repayments, and they often pass down the charge to you. The cost varies by lender, but it’s roughly charged at 6-8% of the amount you’re looking to borrow. The MIG might be charged as a one-off payment, or it could be added to your mortgage advance.
This is on top of the other fees that tend to accompany a mortgage, like stamp duty and legal fees. We’ve made a list of the hidden costs of buying a home to make sure your wallet’s prepared before taking the plunge.
Your house price might fall
This is a risk with any type of mortgage, but particularly so if you’re buying with a smaller deposit. If your house price drops after you’ve bought it, you could end up owing the lender more than you initially borrowed. This is called ‘negative equity’. It’s a risk because it means you may not be able to move house unless it’s to a much cheaper place, or you could end up having to pay the difference between your new house price and your existing mortgage to your lender in order to move.
Is a low-deposit mortgage right for you?
Only you - and the lender - can answer this one. Before you make any decisions, make sure you’ve carefully weighed up the pros and cons of buying a home with a small deposit. Buying a property is a huge financial commitment, so you want to be sure you’re using your hard-earned money wisely. Plus, you’ll probably want to stay in the home you buy for a few years, as moving house comes at a cost.
There are plenty of alternatives to low-deposit mortgages if you’d like to get on the property ladder but don’t think you can afford to. Government schemes like Help to Buy, Right to Buy and Shared Ownership are all worth considering before you make a decision.
Lastly, remember that lenders will do an affordability test when you apply for any type of mortgage. They’ll look at factors such as your income and your outgoings, as well as what’s in your credit report, so it’s not just the size of your deposit that could pose a problem.
Buying a home is incredibly exciting, and fortunately there are several options out there for first-time buyers. So we suggest you do your research and make sure you’re getting the best deal for your circumstances before pouncing on what might seem like an unmissable deal. If you’re unsure about where to start, you can get free advice from L&C, the mortgage experts. Happy house hunting!