If you’re looking to buy a property, it can be easy to become caught up in discussions about deposits. If you have a large amount of money to put down as a deposit, you are likely to benefit from this. However, those putting down a deposit of just 5 percent will also be eligible for certain mortgages. This article will discuss how much of a difference the value of your deposit makes to your overall mortgage experience.
What do we mean by a large deposit?
Generally, a deposit of 25 percent would be considered a large deposit when it comes to buying property. This would mean a loan to value (LTV) of 75 percent, which is usually where the best mortgage rates lay. Most lenders require buyers to put down a deposit of at least 5%, but this does often mean that they’re ineligible for mortgages with more competitive interest rates.
Why would you put down a large deposit?
A large deposit, in short, can mean that you’ll be eligible for mortgages with lower interest rates, or shorter mortgage commitment. If you want to own your home after paying mortgage payments for just 10-15 years, then a large deposit will almost always be required.
What is the standard deposit?
A deposit of 10 percent is usually recommended to be eligible for reasonable rates from most mortgage providers. Most people consider 10 percent to be the standard deposit amount when buying a home. However, it can be difficult for many people to find this amount of money to put down as a deposit, which is why 5 percent deposit mortgages are becoming more common.
Will I be eligible for all mortgages if I have a large deposit?
Requirements vary depending on lenders, but a larger deposit will usually give you more opportunities to access competitive rates. This isn’t always the case though, as mortgage eligibility isn’t based solely on the down payment amount. Lenders take several factors into consideration before offering a mortgage to an individual or couple, this includes your credit rating, salary, and ability to pay back the monthly amount required and, in some cases, your age. If you already have outstanding debts when applying for a mortgage, a lender may be less likely to offer a mortgage to you. Therefore, it’s usually a good idea to clear as much pre-existing debt as possible before applying for a mortgage. Some lenders will still offer a mortgage to you if you have pre-existing debt, but your interest rate may suffer because of this.
The type of property can also have an impact on whether or not you’ll be eligible for a mortgage with a large deposit. Some properties that may not be considered “standard” (e.g bricks and mortar) may be more difficult to obtain a mortgage on. Some lenders may not offer mortgages on properties with thatched roofs or timber frames and you may be required to go to a specialist lender, even if you do have a large deposit.
Will I definitely get better rates with a larger deposit?
Most lenders work on the basis of LTV and calculate interest rates based on this. Interest rates are usually tiered depending on the LTV, which means that the larger the deposit is, the better the interest rate will be. The LTV works on the premise that the lower the value of the loan is on the property, the less risk there will be for the mortgage provider. This is because you’ll have more equity with a larger deposit and the mortgage provider will be less-effected if the property loses market value. As a general rule, those that have a larger deposit are more attractive to mortgage providers, especially if they meet other criteria such as consistent salaries, less pre-existing debts, and a good credit score.
A larger deposit can lower your monthly mortgage payments
If you aren’t worried about owning your home in a shorter space of time and reducing the time it will take to pay off your mortgage, a larger deposit can be a great way to reduce your monthly mortgage payments. For example, if you take out a mortgage on a £200,000 property with a 10% deposit at a 3 percent interest rate, your monthly payment would be £853.58 compared to £758.74 if you were to put down a 20 percent deposit. This means you’ll save nearly £100 per month by opting to put down a larger deposit.
Large deposits and low income
As mortgages are offered based on a number of factors, with the main one being your income, sometimes a large deposit isn’t always enough. Lenders need to be reassured that borrowers can meet their mortgage payments and salary is a big factor in this. However, there are certain things that may be taken into account if your income is low such as personal assets, benefits, stocks and shares and additions to your salary such as overtime or commission bonuses.