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Low deposit mortgages

Author: Myles Robinson - Expert Finance Advisor

Posted: May 15, 2022

Low deposit mortgages guide

Low deposit mortgage is not easy to save for a mortgage deposit due to the high property house prices and low wage growth in the UK. As they try to cover the large mortgage deposit, younger buyers or first-time buyers may find it difficult to get into the market.

However, the first half of the 2020s will be marked by a slower house market price increase.

A low-deposit mortgage guarantee scheme may be a good option if you don’t have the funds to make a large deposit but still want to invest in property.

Our expert mortgage brokers will offer the best mortgage rates for low deposit mortgages.

What low-down mortgages are available for you?

Many mortgage lenders require a minimum of 10% mortgage deposits to secure residential mortgages. However, some providers will accept a 5% deposit.

Some mortgage brokers offer 100% mortgages with zero deposit mortgages for those who have no lump sum to place down or when a relative act as a guarantor.

This will be different for some borrowers. That is why many customers want to know what the minimum deposit is for a UK Mortgage.

The minimum deposit required by lenders can vary and could also be dependent on the type of product of the mortgage you are interested in.

The minimum deposit for buy-to-let mortgages is often higher than standard residential loans and can often be as high as 25%.

A 95% LTV Mortgage with a 5% Deposit

*UPDATE 7/04/2021: Since the outbreak of coronavirus, new ways to obtain a mortgage with a 5% deposit were created. For more information on the government’s guarantee buy scheme, see our comprehensive guide to 95% LTV mortgages.

If you pass the mortgage affordability tests, some lenders will give 95% mortgages to you. The government guarantee Help to Buy program has made it easier to get these deals so you can be on the housing ladder.

Our mortgage advisor will typically offer the best rates to borrowers who have larger deposits and no bad credit history. This means that a 30–40% deposit is required to get a top deal with lower monthly repayments. However, if you only have a 5 per cent deposit, be prepared for higher interest rates and higher monthly payments.

Although you may have to pay lower interest rates, this doesn’t mean that there aren’t great deals for those with a smaller deposit.

Talk to a mortgage broker who specializes in whole-of-market mortgages to find the best deals on a 5% mortgage deposit.

To get low-deposit mortgages from UK lenders, make an enquiry. They will be able to find you a great repayment mortgage that you won’t see on the high street.

What is the maximum amount I can borrow with a 5% mortgage deposit?

In the past, lenders calculated how much you could borrow simply by multiplying your salary by four to five. Although lenders still do this today, they are more concerned with affordability. This is not just about the amount on your paycheck slip.

Mortgage providers will consider the following factors when determining how much they are willing to lend you with a deposit of 5%:

  • Credit score – The better the credit, some lenders will still consider borrowers with poor credit files. Our advisors are experts in helping people obtain a mortgage for bad credit.
  • Other outgoings you’ll be considered lower risk if you don’t have any other significant debts against your name when you apply for a mortgage.
  • A standard house or flat made of bricks and mortar is easier to get a mortgage than a nonstandard property such as a listed structure or one with a thatched roof.
  • Your age Some lenders have a minimum and maximum age limit. They won’t accept customers younger than 21 years old or older than 75. However, some providers may consider higher or lower rates depending on the circumstances.

What are the interest rates for low-deposit mortgages?

Simply put, the higher the deposit for a mortgage you make from a savings account, the better your rates will be. Major lenders view customers with higher deposits as less risky, so it is a good idea for you to save as much as possible. More low deposit mortgages are now on the market, a family member gifting the deposit is also a popular option to get a low deposit.

If you don’t have the cash to pay a decent deposit or are struggling to save, a mortgage with a low down payment and a high loan-to-value (LTV) ratio can be a great option.

A minimum deposit mortgage can increase the risk of paying outstanding mortgage rates and additional fees. Higher loan-to-value (LTV) mortgages are riskier, they often have a higher interest rate or charges.

A good credit rating is necessary if you want to get a mortgage with a high LTV. Most lenders will ask for proof that you can afford the higher monthly payments.

Lenders might require borrowers who have minimal deposits to sign up for a mortgage indemnity guaranteed (MIG). This policy protects the mortgage provider in case of default. This is usually included in the interest and fees.

Contact a knowledgeable mortgage broker from our financial group limited who will use their market knowledge to negotiate the best interest rates for you.

First-time buyers can get low deposit mortgages

A low deposit mortgage is available to first-time buyers trying to get on the property market. You are more likely to receive a low deposit mortgage product if you’re a first-time buyer.

Many 95% of mortgages that lenders have offered are targeted at first-time buyers. The government scheme – Help To Buy scheme aims to make mortgages more affordable for first-time buyers and to increase the chances of people getting on the property ladder.

Help to Buy requires a minimum deposit

Buyers must deposit at least 5% and the property cannot be more than PS600,000. To be eligible for Help to Buy

Your deposit will be supplemented by an equity loan of up to 20% of the property’s worth ( 40 in London), which means you won’t need a 75% mortgage. During the first five years, borrowers won’t have to pay any loan repayment fees.

The obvious advantage of Help to Buy mortgages is the ability to take out smaller loans. However, it’s possible to find 95% mortgage deals without Help to Buy and may be able to obtain more competitive rates.

 

What is the minimum deposit required to get a residential mortgage?

A residential mortgage that requires a lower deposit is easier than a mortgage or mortgage because residential mortgages usually require a smaller deposit.

The minimum deposit required to obtain a mortgage in the UK for a zero-deposit mortgage is 5% unless you are planning on applying. These lenders cater to residential buyers as well as the Help To Buy scheme.

If you are looking for a residential mortgage with low deposits, the most important thing to keep in mind is that you must have access to all the markets if you want the best rates.

Although many lenders will not offer favourable rates to you if you have a 5% deposit, the advisors that we work with can help find the best providers for you.

Buy to Let with a Low Deposit

Mortgages to buy-to-let typically require a larger deposit than residential mortgages.

Some UK lenders won’t lend to you if your deposit is less than 25% of the property’s actual value. However, some lenders will work with customers with deposits as low as 10% and others will take 10% or less if you meet their affordability requirements.

Your chances of getting a mortgage with competitive rates are lower if your deposit is below the minimum.

These could be:

  • The viability of the investment (i.e. Whether the rental income forecast will be sufficient to cover the mortgage payments
  • Credit rating
  • Previous experience as a landlord.

Buy-to-let mortgages tend to be interest-only so it is a good idea to have a recognized repayment vehicle to help you repay the loan.

A repayment vehicle can be used to save, invest or use other assets to pay off your interest-only mortgage at its end.

This table will help you understand which types of repayments lenders prefer.

What if I have benefits and need a low-deposit mortgage?

Although it is theoretically possible to get a mortgage with benefits and a low deposit, you will be limited to a few lenders to ensure you receive the best rates.

There are specialists lenders who will work with borrowers who claim to have the following:

  • Credit for child tax
  • Credit for working tax
  • Child benefit
  • Disability Living Allowance (DLA).
  • Industrial Injuries Benefit (IIB).
  • Incapacity benefit (IB).
  • Attendance Allowance
  • Pension Credit
  • Maternity Allowance
  • Severe Disablement Allowance
  • Widow’s pension
  • Carer’s allowance

Sometimes, the lender may not grant benefits loans to borrowers if they are also employed full-time or retired.

If you have good credit and no other debts, you may be able to get a mortgage deal from a specialist provider.

It’s important to seek advice from a broker who can help you with your specific circumstances.

What is the best way to use a low deposit to get a Right to Buy mortgage

The Right To Buy date back to Margaret Thatcher’s time, when it allowed residents of council houses to purchase their homes at a greatly discounted price.

It’s possible to benefit from the scheme with just a small deposit. It may even be possible to purchase your council house without any deposit. In some cases, the Right to Buy Discount can be used instead of a mortgage deposit.

What if I have help from my family and need a low deposit?

Yes, some lenders will accept gifted deposits to help with mortgage applications.

Many UK providers will accept gifts from family members. However, this could affect the rates offered.

Although most mortgage lenders will gladly accept gifts from family members, few will accept third party gifts. This means that a gift deposit from one of your friends won’t be as easy to get approved.

If you have received a gift of any part or all of your deposit, there are several things you should consider.

  • The person giving the money must be aware that they have no ownership rights in the property or the right to receive their money back.
  • You can loan money to family members, instead of giving it away and have it repaid when the property is sold. You should seek independent legal counsel in this situation.
  • The giftee may need to sign a gifted deposit letter or provide documentation from the lender.
  • As proof that the deposit came from, many lenders will request a bank statement.
  • Gifted deposits are a way to supplement low deposits you have saved and can also be used in conjunction With Help to Buy.

A springboard mortgage is another option. This type of mortgage allows you to pay a deposit but your parents or other family members can put money in an account with the lender. They get their money back after three years provided that they have made the mortgage payments on time.

Is there another way to make a deposit?

Yes. You can raise your deposit in many ways other than the traditional saving and deposit method.

These include:

  • Equity release from an existing asset (you can find more information in the next section).
  • Remortgaging your home could be done by parents
  • Direct lenders loans
  • Personal (non-secure) loans
  • Not recommended: Credit card

Capital raising for other properties

You may be able to withdraw equity if you have little or no deposit, and you already own the property.

A remortgage is usually the best option if you have equity.

Remortgages vs. secured loans will give you a better idea of how it works.

 

Concessionary purchases

A concessionary buy means that you can purchase a property at a lower price than its true market value.

Lenders will base the price on the purchase price that you agreed to. Your deposit will then be based on this lower value. PS120,000 property reduced to PS100,000. Customer putting down a minimum 10% = PS10,000 deposit.

Some lenders will accept the discount as a deposit form and then use the market value of PS120,000 (e.g. A minimum deposit of PS12,000 and a discount of PS20,000 are required.

It may be possible to purchase without a deposit in this instance.

There are many types of concessionary purchases: Developer gift, Landlord gift and vendor gift.

Landlord gifted deposit/discount

This is where a tenant purchases from their landlord at an affordable purchase price.

E.g. The house is valued at PS200k. However, the landlord offers to quickly sell it to his tenants for PS180k. This 10% discount will knock 10% off the property’s value. The borrower can use this 10% towards their deposit.

Although there are not many landlord discount mortgage lenders at the moment, there are still some who will consider these applications.

There are often limits on the number of discounts that can be accepted. Discounts cannot be lower than a specified percentage. Any discount below 5-10% will not count towards a deposit.

Lenders may require that the borrower contributes at least 5% of their personal cash. This indicates that the borrower is more likely to repay the loan.

Developer gifted deposit /discount

A housing developer may sell a property at a discount and the lender will credit the borrower with the deposit.

Lenders will often stipulate that the borrower must also contribute some cash. New build properties are sometimes considered higher-risk and lenders may require a deposit of 15-20%.

Vendor gifted deposit/discount – This is similar to a discount for a landlord or developer. It’s a normal purchase made on the open market, but at a lower price, which usually ensures a faster sale.

Because of the higher risk, these are less common and less often accepted by lenders. Your mortgage provider will want to determine the true value of the property and the reasons the vendor wants to sell for a lower price.

Call today to speak with our brokers who are registered by the financial services register.

Discount for Families

This works the same way as a vendor gift deposit but comes with a discount on a purchase made by a family member.

These arrangements are more common and usually come with larger discounts than the actual property value. This arrangement is accepted by lenders because the risk is lower and the reason for the discount is more appealing.

These lenders may not require the borrower’s cash to be deposited, but will instead apply the entire price discount to the mortgage deposit.

For many, however, these options won’t be possible due to a lack of a wealthy relative willing to help, bad credit scores, or affordability issues.

You might want to check out our article getting a mortgage without deposit if you are really having trouble finding ways to fund a deposit.

It’s a smart idea to get advice if you have been denied a mortgage, or are uncertain about the next steps. Our specialist brokers can help you determine the best way to proceed.

Talk to an expert about low-deposit mortgages

Talk to an expert if you have any questions about low-deposit mortgages or which route is best for your situation.

We will match you with a broker that has experience in successfully arranging mortgages for customers in similar situations to help you get the best mortgage deal.

Our service is completely free, and you don’t have to pay any credit rating points. We will save you time, effort and money when it comes to your mortgage.

Call today to speak with our brokers who are registered by the financial services register.

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