How much deposit do I need for a mortgage?

The short answer is five per cent of the purchase price. The more useful answer is that five per cent gets you a mortgage, while ten or fifteen per cent gets you a good one. This guide explains why, what a lender will and will not count as a deposit, and the schemes and habits that help buyers in London get there.

The minimum, and why it is rarely the target

Most lenders will lend up to 95 per cent of a property’s value, which means a five per cent deposit. On a £350,000 flat that is £17,500. A government-backed mortgage guarantee scheme encourages lenders to keep offering these deals, so they exist even when the wider market is nervous, although the choice at this level is always narrower.

The catch is price. Lenders price by loan to value, usually shortened to LTV, which is the loan as a percentage of the purchase price. The bands that matter are 95, 90, 85, 80, 75 and 60 per cent. Each band you drop through, the rate improves and the number of lenders willing to consider you grows. The step from 95 to 90 per cent is usually the biggest single improvement, so an extra five per cent of deposit can cut the monthly payment by more than that money would ever earn sitting in a savings account.

You can see the effect for yourself in our mortgage calculator. Enter a price, change only the deposit, and watch the monthly figure move. Then try a slightly lower rate to reflect the better band, which is the part the calculator cannot know for you.

What a lender counts as a deposit

A deposit has to be your own money or a genuine gift. Lenders check where it came from, partly to prevent money laundering and partly to make sure you are not borrowing it.

• Savings are the simplest. Expect to show three to six months of statements for the accounts the money sits in.
• A gift from family is accepted by almost every lender. The person giving it signs a short letter confirming it is a gift, not a loan, and that they will have no interest in the property. They may also be asked for identification and proof of where their money came from.
• Equity from a sale counts if you are moving. The proceeds of your current home, less the mortgage you repay, become the deposit on the next one.
• An inheritance is fine with the paperwork from the estate.

Borrowed money is not a deposit. A personal loan or a credit card advance will be found in your statements, and most lenders will decline the application rather than reduce the amount. A few builder incentives on new homes are allowed, within limits that vary by lender.

Help for first-time buyers

Two things do most of the heavy lifting for first-time buyers in London.

The Lifetime ISA lets you save up to £4,000 a year and adds a 25 per cent bonus, so up to £1,000 a year of free money. You need to open it between the ages of 18 and 39, hold it for at least twelve months before using it, and buy a first home worth £450,000 or less. Withdraw the money for anything else and a 25 per cent charge takes back the bonus and a little more, so it only suits people who are fairly sure they will buy.

Stamp duty relief means a first-time buyer pays nothing on the first £300,000 of a home worth up to £500,000, and five per cent on the part between £300,000 and £500,000. Above £500,000 the relief disappears entirely. The stamp duty tab of the calculator works this out for the price you have in mind.

Shared ownership lets you buy a share of a home, often between 25 and 75 per cent, and pay rent on the rest, so the deposit is a percentage of the share rather than the whole price. First Homes offers discounts of at least 30 per cent on selected new-build homes for local first-time buyers, with rules set by each council.

The costs that are not the deposit

The deposit is the biggest number, but it is not the only one. Budget separately for a survey, the solicitor’s fees and searches, removals, and any stamp duty. Keep a buffer for the first month in the new home, when the boiler always seems to know you have just moved in. Our own fee for arranging the mortgage is set out before you commit to anything.

Working out your own number

Start from what you can borrow rather than from what you can save. Most lenders lend around four and a half times a household’s income, so two salaries totalling £70,000 point to borrowing in the region of £315,000. Add a ten per cent deposit of about £35,000 and you are looking at homes around £350,000. The affordability tab of the calculator does this arithmetic with your own figures.

If the answer is further away than you hoped, the choices are to save for longer, to look at a smaller share through shared ownership, or to ask family whether a gift is possible. There is no wrong answer, only the one that suits your circumstances.

Next steps

When you have a rough deposit and a rough price, ask us for a quote. An adviser will check what you could borrow across the lenders we work with and arrange an agreement in principle, which is the piece of paper an estate agent wants to see before they take an offer seriously.

This guide is general information, not advice. It describes how things usually work and cannot take your circumstances into account. For a recommendation, speak to an adviser.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Our mortgage broker fee starts from £495. The exact fee depends on your circumstances and is agreed with you before you commit to anything.