Myth Busting: Do you need a 20% deposit to get a mortgage?

When buying a property, the amount of cash buyers needs to save or have access to for a deposit is a vital but often misunderstood component of the purchasing process. Over recent years, the media has fluctuated between promoting 5% mortgages and warning of the necessity for a 20% mortgage deposit. 

For many, gathering a 20% deposit seems like an impossible feat. For a first-time buyer, it could mean years of additional saving or relying on borrowing from other sources. For those looking to move up the property ladder, it could require not only using the equity that has built up on their current property but also dipping into savings. 

So, is this 20% mark really essential? And if not, why is it often espoused as the golden standard to be aimed for? 

The exchange deposit and the mortgage deposit 

It may be a surprise to some that two different deposits are involved in the conveyancing process - the mortgage deposit and the exchange deposit. Before you stop reading and give up all hope of buying, this does not mean you need to save double the money; these are not two separate pots of money but two different uses for the same funds. 

The exchange deposit is the factor that we, as solicitors, are concerned with and can give advice on. This is the amount of money which will be sent to your seller at the point of the exchange of contracts. The Standard Conditions of Contracts of Sale dictate that this amount is 10%; however, this number can be varied depending on the agreement of the seller. Often, a lower deposit of 5% will be negotiated, but it would be very rare to see the need for over a 10% exchange deposit. 

The mortgage deposit is the amount you can afford to put towards the purchase price of the property you are buying at the outset. The minimum amount for this deposit will be set by the lender, your mortgage provider. Generally, you will need at least 5% of the value of the property as a deposit. However, some lenders will require a higher Loan to Value, which can be as high as 20%. You can elect to pay a higher deposit if you have access to the necessary capital. 

If a buyer has a mortgage deposit of 20%, they send the exchange deposit of 10% to the seller at exchange and then, at completion, send the additional 10%, along with the remaining mortgage amount, to the seller. 

Deposit amount considerations 

It is perhaps not a shock that having access to additional funds and higher mortgage deposit comes with several benefits. These include:

• Interest rates: You will be a lower-risk borrower if you can secure a higher deposit, and therefore, lenders offer more favourable terms, including lower interest rates. 
• Loan repayments: Regardless of interest rates, if a higher deposit is offered, the overall loan correspondingly decreases, and therefore, your overall borrowing and monthly repayments reduce.
• Diversity of mortgage offers: As a more attractive borrower, you are likely to attract a greater number of mortgage offers and have the luxury of selecting one that suits you. 

Conversely, if you are looking to secure a mortgage with a lower deposit, the opposite will be true of these points: interest rates and repayments will be higher, and the number of offers you receive will likely be less. 

Tips when considering offers

We urge buyers to consider which lender they use carefully and not jump at the first offer. Being discerning is particularly important if you are looking to secure a mortgage of 90% or higher. A 95% mortgage is a substantial undertaking, and being informed of the conditions and the full ramifications is crucial. 

Our top tips are:

1. Identify what you’re looking for and thoroughly read any documentation to ensure the loan terms are amenable to your preferences, from the term of the loan to the fees and charges attached to early repayments; 
2. Consider whether lenders are known and reputable; 
3. Shop around and compare rates, fees and mortgage conditions, and 
4. Speak to friends, family, and professionals to hear about their personal experiences. 

So, in short, no, a 20% deposit is not a prerequisite of a being able to purchase a property. However, it is a consideration that goes beyond just the point of purchase; the amount you can offer as a mortgage deposit will have a lasting impact on your monthly outgoings and finances for years to come.  

Purchasing a property, whether it’s your first time or your fiftieth time, is a significant investment and substantial risk. As with the entire process, it is crucial to have a team of professionals who can help make it as smooth and cohesive as possible.

If you would like to discuss the purchase of a property, please do get in touch. I can be contacted on 0330 818 3208 or via email at [email protected]

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