Buying a home for the first time is a massive step - but the deposit is often a stumbling block for first-time buyers.
It can take years to save a sufficient amount or be impossible, so there are several ways to approach the problem and get your foot onto the property ladder.
From April 2021, the UK government launched the new mortgage guarantee scheme, one of several available initiatives that might make it easier to buy a first home with a much smaller deposit.
The programme lets buyers put down a 5% deposit against the property value, borrowing the 95% balance from a lender. Providers have government backing to minimise their risk.
In this guide, the Revolution Brokers team explores the general deposit requirements for a first-time buyer and how the guarantee scheme - and other options - might be an excellent option for you.
To find out more or compare rates available on guaranteed mortgages, please give our friendly team a call on 0330 304 3040 or email us at email@example.com.
How Does the Mortgage Guarantee Scheme Work?
The scheme we've mentioned allows buyers to qualify for a mortgage with a small 5% deposit. To put that into context, if you wanted to purchase a home worth £250,000, the deposit would be:
- £12,500 for a 5% deposit mortgage
- £25,000 for a 10% deposit mortgage
- £37,500 for a 15% deposit mortgage
Lenders look at a broad range of criteria to work out the maximum they will lend you, including your income, expenses and other debts.
For individual mortgage applicants, the basic calculation usually means lending up to four times your annual salary.
If you apply as a joint applicant, they'll offer around three times your combined income, or four times the first salary plus the total of the second annual income.
Other circumstances matter since a mortgage lender can't extend more than you can afford, so they'll also ask about other debts, childcare costs and your monthly outgoings.
What Loan to Value Ratio Can I Borrow on a First Property?
Loan to Value, or LTV, means the amount you are borrowing against the total property value.
For example, if you buy a home worth £300,000 and have a 10% deposit of £30,000, the mortgage required is £270,000.
Your LTV would be 90% on that mortgage, as you're applying for a mortgage of 90% of the purchase price.
First-time buyers using the mortgage guarantee scheme are borrowing at 95% LTV, which is very high on the general mortgage market.
However, because of the government guarantee, lenders can offer more competitive interest rates and viable terms, which you'd not get on any other mortgage at the same level of risk exposure.
There are several factors to consider when working out what deposit to offer and what that means to your mortgage LTV:
- The higher the deposit, the better your application prospects. Lenders will usually advance more attractive rates to mortgages with a substantial deposit value.
- If you contribute a higher deposit, your rates will be lower, and therefore your monthly payments will also be less.
- First-time buyers with a small deposit run the risk of falling into negative equity. That happens if your home falls in value, and you owe the lender more than the value of the property you own.
However, house prices can rise while saving for a larger deposit, which can make it extremely tough to save enough if you're chasing a percentage deposit with an overall house price that keeps climbing.
Going ahead with a smaller deposit can also be beneficial to avoid paying out rent for longer than necessary, which you could be putting towards mortgage repayments.
Are There 100% Mortgages Available for First-Time Buyers?
A 100% mortgage is rare. In essence, that means borrowing all of the money required to purchase the property without any deposit.
Most lenders will only consider a 100% mortgage if the applicant has a guarantor. That person, often a parent, is responsible for the repayments if you fall behind.
Mortgage LTVs at 100% sound attractive since you don't need to save up a deposit, but they can be very risky.
For example, your exposure to a negative equity situation is higher, and your interest charges will be much more expensive than if you had a down payment available.
How Can I Raise a Deposit for a First-Time Home Purchase?
Lenders all have policies about the deposit sources they deem acceptable. There are a few solutions that might be beneficial:
- A Lifetime ISA allows you to save up to £4,000 a year, with a government contribution of £1 for every £4 saved - this can top-up your savings and help you reach your target deposit faster.
- Regular savings accounts can offer interest, but note that these rates tend to be very low, so it usually doesn't mean adding much to your savings pot.
- Budgeting apps can also be a great way to set aside a regular monthly amount and help you keep an eye on your outgoings.
- Family contributions are widely accepted but need to be a gifted deposit rather than given to you as a loan.
Support Schemes for First-Time Buyers
As well as the mortgage guarantee scheme we've explored, many other programmes are designed to support first-time buyers.
- Shared equity schemes mean you can purchase a proportion of a home, even if you don't have the deposit or budget to buy the whole property. You can usually use a loan for the deposit and typically pay rent to the housing authority for the balance. Applicants can purchase additional shares as they go.
- Many lenders offer specialist mortgage deals aimed at first-time buyers, most with smaller deposit requirements. Some examples include high street bank first-time buyer mortgages and guarantor mortgages.
Other options include Help to Buy equity loans, Right to Buy and other initiatives coordinated by local housing associations and councils.
If you'd like more information about low deposit mortgages for first-time buyers or to work out how you can purchase a first home with your existing savings, please get in touch.
Revolution Brokers offer an independent, whole-of-market service to ensure you get access to the best deals that are suited to your circumstances.