How to get a mortgage deposit and work out how much can you afford

Deposit: You may get a better mortgage and property by saving for a bigger deposit

Saving for a mortgage deposit can be the biggest obstacle to securing a home loan.

The more you can put down, the cheaper your mortgage rate is likely to be, but this could mean waiting longer to get on the property ladder and missing out on deals.

Rising house prices, stagnant wages, low rates of interest on savings and the cost of living can make it very hard to save a deposit.

This ends up being the biggest barrier many homebuyers face.

Raising just a 5 per cent deposit against a £150,000 home means you will need £7,500, to get to ten per cent you will need £15,000 and to reach the average first-time buyer deposit of 20 per cent you will need £30,000.

But saving that amount of money is a tall order for most people.

But it is not just your savings that you need to think about.

As well as the size of your deposit, the amount you can borrow for a mortgage will depend on your age and the lender’s own credit scoring and application process.

Loans range up to 95 per cent of a home’s value with the borrower having to stump up the remaining amount.

Many lenders are reluctant to lend into retirement, so it will be trickier to get a big 30-year mortgage at age 45 as this would push you into retirement age.

Lenders will also base the amount you can borrow on your marital status, income, any childcare costs and what it thinks your future expenses could be.

You can boost your chances by getting your finances in check. Lenders will place a big reliance on your credit score when making a decision on whether to give you a mortgage and how much to provide, so it is vital that you keep a check on your own rating.

Savings

Buying a property and paying off the mortgage will most probably be the biggest expense you face, so it is important to get the best deal.

While owning a property is the ideal aim for many people, waiting until you have a significant amount of savings if you can, rather than rushing in with a small deposit, could save you money in the long run.

If you do have money to put away and are not in a hurry to get on the property ladder, then it may be worth saving to boost your deposit.

Consider the target area and type of property you are looking for to get an idea of the sort of price you may need to pay and mortgage you may need.

With these figures in mind, you can then make a savings plan which should set out how much you can and need to put away, and how long it should take.

• Find out how to make a savings plan

The best ways to save are using tax efficient investments such as Isas, or there may be decent rates on savings accounts.

You could find cash Isas or bonds that will give you a fixed return on your money.

The longer you lock your money away for, the more interest you can get.

If you are feeling more adventurous you could also consider an investment Isa, which gives you access to the stockmarkets and funds. This is more risky, but the returns could be greater.

Use our savings calculator to work out what sort of return you would need to reach your ideal deposit.

• Compare the best cash Isas

If you have a lot of savings and can’t find a decent rate of return, it may be worth considering an offset mortgage, which will use this money to reduce the cost of your home loan.

Government help

The government is trying to alleviate the barriers to getting on the property ladder with the Help to Buy Scheme.

The idea of the scheme is to encourage lenders to provide mortgages that require just a 5 per cent deposit from the borrower on properties worth up to £600,000.

The first part of Help to Buy, the equity loan component, offers to boost small deposits for those buying a new build home, by delivering an interest-free loan of up to 20 per cent of a property's value if the buyer also puts down at least 5 per cent. 

The loan is interest-free for five years, after which a low rate of interest starting at 1.75 per cent and rising gradually each year is triggered.

The second part of Help to Buy offers banks and building societies a mortgage guarantee against losses on up to 20 per cent of a property's value, if a home buyer puts down at least a 5 per cent deposit on any home. The aim is to encourage more lending requiring small deposits.

Many of these types of mortgages are were priced just under 4 per cent in mid February 2016 but rates fluctuate so always shop around to compare the latest deals.

And remember, some lenders outside of the Help to Buy scheme will offer competitive mortgages for a 5 per cent deposit anyway and then you won't be restricted to buying a new build.

• Check the best mortgage rates for different deposit sizes

Shared ownership

Under shared ownership the buyer purchases a share of the property, say half, and pays rent to a housing association on the other half.

You’ll need to take out a mortgage or pay a cash deposit for your share (which can be between 25 and 75 per cent) of the home’s purchase price.

Shared ownership is available to customers whose household income is £60,000 or less (£71,000 or less for one- or two-bed in London, and £85,000 or less for a three-plus bed).

First time buyers, former owners who can't afford to buy one now and people who rent a council or housing association property are all eligible for shared ownership.

Such schemes have helped thousands of people on to the property ladder in recent years. But strict housing association rules mean there is little flexibility if your circumstances change.

For example, most housing associations take a tough stance on allowing you to rent out your shared-ownership property.

This is particularly problematic for those who bought a few years ago and now need to move.

If you bought before the housing market went into freefall, the property may well have fallen in value and you won't be able to sell without making a loss. 'Staircasing' up to 100 per cent ownership will be unaffordable for many, so some may have no choice but to stay put.

• Find out more about shared ownership schemes

Bank of Mum and Dad

Some lenders will also offer guarantor schemes where a charge is placed on a parent’s house or some savings are put aside as part of the deposit.

The traditional option for parents to help their kids was to become a guarantor. This would allow your children to take a larger loan. But it is fraught with danger.

Typically the lender will expect you to put your home as collateral, so, if your children don't pay their mortgage, the lender can come after you.

That's all very well for your own children, but what if they are married or co-habiting? Do you really want to gamble your home on your son or daughter's relationship?

Alternatively, a parent or grandparent could to use their savings to reduce the amount of interest their children will be charged. Your money stays in your own savings account and your children can't touch it. The catch is that you won't earn any interest. Instead your savings will be set against the amount they have borrowed, so they will pay less interest.

• Find out more about guarantor mortgages