Why the size of your deposit matters

September 5, 2016 by Brendan O'Neill

Advice & Tips

Saving for a deposit on a home used to a fairly simple process, by placing a percentage of your monthly income into a bank account, you would be sure to have sufficient funds to buy your dream home after a couple of years of saving. However, as property prices continue to rise, especially in London, much larger deposits are now required.

The amount you save as a deposit will have an impact on the mortgage deal you secure with a lender. This is because a lender wants to reduce the risk of lending, and interest rates will be far higher on a larger mortgage loan.

The amount you save will be a percentage of the overall cost of the property, therefore £10,000 would be a 10% deposit on a house worth £100,000. The amount which requires a mortgage, the remaining 90%, is known as the Loan To Value rate. The higher the LTV, the higher the interest rates will normally be.

Once you manage to save a 40% deposit, this is when you will notice that the mortgage deals have much lower rates of interest, as the risk taken by the lender has been reduced. However, by saving up as much money as you can for your deposit, your CeMAP qualified mortgage adviser will be able to help you secure the best rate deal for your circumstances.

Keeping expenditure as low as possible will help you amass a larger deposit. If you are in rented accommodation, perhaps you could live with parents or a relative while you save for a deposit, to reduce outgoings. A decent deposit will cut the costs of your mortgage and may help you to take out the mortgage over a shorter term.