How do deposits work?
When you buy a property you have to pay a percentage of the purchase price yourself, which is called the deposit. Your mortgage lender pays the rest.
For example, a 10% deposit on house that cost £200,000 would come to £20,000.
Your mortgage would be for the remaining £180,000, which would be 90% of the property's value. This is shown as a percentage of the purchase price, called the loan to value (LTV).
Lending you less than the full value of your home protects lenders if you fall behind on your mortgage repayments. The more you put towards the purchase yourself, the less lenders would need to get back to cover their costs if they repossessed your property.
How much do you need to save?
This will depend on:
The value of the property you buy, because the deposit is calculated as a percentage of this
The LTV of the mortgage you take out, because this sets the percentage you need to pay yourself as a deposit
Every mortgage comes with a maximum LTV, which is the highest percentage of the purchase price it can cover. For example, you would need a deposit of 15% or more for a mortgage with a maximum LTV of 85%.
Some mortgages have an LTV of 95%, which means you need a 5% deposit. If you bought a property for £150,000 you would need a £7,500 deposit.
Saving a larger deposit means more mortgages will be available to you, so you should be able to get a cheaper deal.
This is because mortgages with a lower LTV usually have lower interest rates. Your monthly repayments will also be cheaper because a larger deposit will also give you a smaller balance to pay off.
What is the minimum mortgage deposit?
The only deals currently available that do not require a deposit at all are guarantor mortgages, which require a relative or friend to be named on them.
How to put together a deposit
You can build up your deposit by:
Using your existing savings
Saving money each month
Borrowing from your family or friends
Using money given to you as a gift or inheritance
Putting aside a regular amount every month could work better than paying into a savings account whenever you can because it reduces the temptation of spending the money. You can increase the amount you save each month by:
Sticking to a budget
You can control your finances and work out the maximum you can save each month by carefully planning your spending.
Here is how to write a simple and realistic budget.
Cutting back your spending
These guides explain how to cut all of your living costs.
Spending less on rent
If you currently rent your home, you could cut your costs while you save a deposit by:
Moving into a cheaper property
Moving back in with your family
Living in a shared property with friends
If you live alone, read our guide to cutting your costs.
Should you use a bank loan for your deposit?
If you borrow money for a deposit, lenders could decide that you cannot afford a mortgage.
Some lenders only let you use your savings or a gift towards your deposit, and they can check your credit record and bank statements to see where your deposit came from.
Paying back a loan as well as your mortgage could also stretch your finances too far.
What help can you get?
There are schemes that can help you save for a deposit or buy a home with a small deposit:
Help to Buy ISAs let you pay in up to £200 per month when you save for your first property.
You can get tax free interest and a 25% bonus of up to £3,000 from the government. The bonus is paid to you after you have bought your home, not as part of your deposit.
You can get help buying your first home through several schemes and mortgage types, including:
The Right to Buy scheme
This guide explains how to buy a home even if you have a small deposit or no deposit at all.
Where to save a deposit
It is usually easier to save a deposit by putting money aside into a separate account so you can keep track of how much you have and avoid accidentally spending it.
You can set up a standing order to transfer a set amount from your bank account into your savings each month.
Some current accounts let you set up a sweeping facility, which automatically transfers your leftover money into your savings.
You can choose a date for your current account to transfer some of the money in it to your savings. You do this by setting the amount that you want to have left in your account after the sweep. For example, you could choose to transfer all of the money you have left at the end of the month or any amount above £1,000 at the start of the month.
Choose a savings account
Saving your money in the right account can boost your deposit fund because it will pay more interest if it has a higher rate.
Find a savings account that will let you withdraw and pay in when you need but also offers a high interest rate. The types you can get include:
Regular savings accounts often have some of the highest interest rates as long as you pay in a set amount each month.
Instant access accounts let you withdraw from them at any time, which is useful if you need money in an emergency.
Notice accounts let you withdraw from them as long as you request the withdrawal in advance. You will need to give notice of between seven and 365 days.
Fixed rate savings accounts guarantee their interest rates for a period of three months to seven years. Their rates will stay the same until the end of this period, but you usually cannot withdraw before then without paying a penalty.
Cash ISAs let you earn interest without any tax being deducted.
Investment ISAs are free of income tax and let you invest in the stock market. It may be possible to make more than you would get in interest on a savings account, but you could also lose money.