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Tembo's Guide To Deposits

Tembo's Guide To Deposits

By Miranda Harding
Published 6 September 2022

Whilst deposits sound pretty straightforward, there is often more to them than meets the eye. Read our guide to deposits.

In this guide

How much deposit do I need for a house?

The minimum deposit that you would need to typically purchase a property is 5%. So, if you’re looking to buy a property worth £250,000, you would need a downpayment of at least £12,500.

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Sometimes it pays to have a bigger deposit.

On average, client’s who boosted their deposit saved £14,000 on interest alone in the first five years of their mortgage.

Buying with a small deposit

Don’t panic if you only have a 5% deposit! You can buy a property with a 95% mortgage. As of the 1st March 2022, 51 lenders offer this as an option. The Mortgage Guarantee Scheme set in the April 2022 Budget has meant that the government has shouldered some of the risk of 95% mortgages, alongside lenders. This has led to more choice for borrowers with a 5% deposit, with access to lower rates than previously.

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What's the average UK house deposit?

On average, a solo buyer looking to purchase their first home needs a £74,000 deposit to get on the ladder.

How to save for a deposit

Saving for a deposit is notoriously challenging, so it’s a good idea to set a bit of a plan if you’re seriously considering buying a property. When trying to set some money aside each month, consider:

  • How big a deposit you are wanting to save
  • Whether you can realistically set aside money each month on top of your current outgoings
  • Where you want to buy a property and how much a property typically costs

There are options out there if you’re looking for assistance to save. 

  • If you open a Lifetime ISA you are entitled to a government bonus. The minimum age requirement is 18, and you can’t be older than 40. With a Lifetime ISA you can top up your savings with up to £4000 each year until you’re 50. The government will then give you a 25% bonus up to a maximum of £1,000 a year. The money can either be used for a house deposit or for your retirement, in which case you can’t take your cash out until you turn 60.

If you already have a Help to Buy ISA

  • You can no longer open a Help to Buy ISA, however if you do have one currently, you can pay into until November 2029 and claim the 25% bonus until November 2030. You can pay up to £200 a month into the ISA, and the government will top up your savings by 25% (up to £3000) when you buy your first home. The property you buy must be the only home you own, and has a maximum purchase price of £250,000 (or up to £450,000 in London).

The advantages of having a larger deposit

Sometimes it pays to have a bigger deposit - the larger your deposit is, the lower your interest rate will be. As you have more equity in your home instead of debt, you pose a lower risk to the lender, and can therefore offer cheaper interest rates.

Loan to value (LTV) bands correspond to the size of the mortgage you need, and an interest rate is applied to each of these bands. Whilst that can sound confusing, it’s actually pretty simple. So, if you have a 40% deposit, you need to get a mortgage of 60% of the rest of the property price. If you have a 40% deposit and 60% mortgage, it’s likely you will be offered the lowest interest rate on the market. If you have a 95% mortgage, it’s likely you’ll be offered the highest.

Gifted deposits

It’s never been harder for buyers to save a deposit. That’s why many buyers are being gifted deposits from family or parents to get into their first home. 

A gifted deposit must be a gift - so, the buyer can’t be expected to pay the money back. If the deposit is in fact a loan, the lender will reassess your affordability, and may consider the monthly payments paying back the loan as part of your monthly committed outgoings.

Gifted deposits from close family, such as parents, siblings and grandparents, are most commonly accepted by lenders. When buying a property with a gifted deposit, you must be able to prove that it is 

1. A gift

2. The gifter has no legal right to the property

To prove that the deposit is in fact a gift, the gifter needs to show in writing that it is a gift and there is no obligation for the buyer to repay. This Gifted Deposit Letter must include the gifters name, the buyers name, the amount of money gifted, where the money has come from, the relationship between the gifter and buyer, confirmation that the gift doesn’t need to be repaid, and evidence that the gifter is financially solvent. 

This letter needs to be signed by the gifter. The gifter will also need to show a build up of funds - which usually includes bank statements, but could also include a will, a completion statement, or a bond statement depending on the source of funds, as well as general anti-money laundering checks that are undertaken. 

The gifter may also be asked to sign a letter that says they have no interest or equity in the property that the buyer is purchasing.

Buying with no deposit

It is possible to get a mortgage with no deposit. You can do this with a guarantor mortgage. In order to be eligible for a guarantor mortgage, your parents can either put some savings with a certain bank, or offer their home as security in case the buyer is unable to pay. The Lloyds Lend a Hand and Barclays Springboard deals are two more well known 0 deposit mortgages. 

If parents don’t have cash savings to invest in their child’s first home, they can unlock equity in their property to gift to the buyer. At Tembo, we call this a Deposit Boost. Watch our video below to learn more.

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Kirsty White

Mortgage lead

Learn more about Tembo's Deposit Boost

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