How much mortgage deposit is enough?

It is certainly fair to say that the mortgage market has changed dramatically over the last 12 months. With Banks running out of money due to their risky lending practices of recent years, it was only a matter of time before they tightened up their rules on who, or what makes a suitable mortgage applicant. 

Whilst the banks have only made minor changes to the income multiples/affordability calculations they use, they have made massive changes when it comes to the size of deposit you require. The likes of the 100%,95% residential mortgage or 15% deposit buy to let mortgage appear to have been consigned to history. Currently only 10 lenders are offering mortgages of 90% of the property value. Putting it another way, only 10 lenders feel they can take the risk of lending you money with a 10% deposit.

Lenders have always priced the mortgage rates they offer on the risk they feel they are taking. Up until 2008 a 10% deposit was considered a low risk mortgage to the lender, 15% even lower and 25% or more, lowest risk of all. Lenders always asses the risk they face in lending money according to their worst case scenario, which is a property being repossessed. In setting their mortgage rates lenders have to take a view on the likelihood of the mortgage not being fully repaid should they have to repossess the property. 12-24, months ago lenders felt that a 10% fall in house prices was unlikely, 15% very unlikely and a 25% fall bordering on impossible. As a result of this, clients who could raise higher deposits benefited from lower rates, those with 25% deposit receiving the very best rates on the market. 

As we have seen a slow down in the housing market coupled with house prices falling, lenders now feel that lending to people with less than a 10% deposit is just too high risk. Only 10 lenders currently feeling a 10% deposit provides sufficient protection for them in the event of repossession. As a result of this, we have seen lenders alter how they band the risk they are taking with mortgages. Deposits are now banded into 4 main groups, 10%, 15%, 25% and 40% with the mortgage deals available reflecting these deposit bandings. The difference in interest rates between the costs of a mortgage for an individual with a 10% deposit over someone with a 40% deposit can be as high a 3%. 

So how much is the right deposit? 

Generally it is a balancing act between getting as much saved as possible and securing the house you want. If a few extra months savings could mean you having a 15% deposit instead of a 10% its probably worth waiting. If it will take you a year or more of saving whilst paying rent, it's probably better to work with the 10% deposit you have saved already. 

Due to the way lenders price their mortgage deals, a client with a 14.99% deposit (not 15%) will end up getting the same mortgage deal as a client with a 10% deposit. So if you can't make it into the next deposit band it will have little beneficial effect in terms of the mortgage deal you get. Although you will not benefit from a lower cost mortgage deal, if you opted to put down a larger deposit you will need a smaller mortgage, so have lower monthly repayments.

02/03/09

Please note, the information provided does not constitute advice. You should contact us to arrange a financial review should you require any further information.