What Can I Use for a Mortgage Deposit?

If you are looking to buy a property you may be wondering how much deposit you will need for a mortgage. Saving for a mortgage deposit can be difficult and you may wonder what your options are to help get your mortgage.

The good news is there are several ways to get a mortgage deposit and lenders accept a wide range of deposit sources for mortgages.

Let’s explore some of the ways you can get your mortgage deposit.

Why Do You Need a Mortgage Deposit?

When a lender offers you a mortgage, they are taking on a level of risk. This is because if the property value decreases or you are unable to keep up with mortgage payments, they may not be able to recoup the money.

To mitigate some of this risk, lenders request you put down a mortgage deposit down. This deposit means you will automatically own some of the equity in your property.

For example, if you have a 10% deposit on a £200,000 property you will own £20,000 worth of equity in the property at the time of purchase. If you are unable to pay back the mortgage, the lender knows there is a £20,000 safety net, assuming no change to general house prices.

In short if your property is repossessed and sold at auction, a lender has more chance of recouping the loan if there is a difference in the property value and the amount you owe.

What’s the Average First Time Buyer Deposit?

Deposit values for first time buyers range anywhere from 5% up to 99% of the property value. It is entirely up to you how much deposit you put down on a property, but 5% is the minimum.

The greater the deposit the less you will need to borrow from a lender. Because interest is charged on the amount you borrow, a higher deposit saves you money over the term of the mortgage. Adding just 5% in deposit value can save you thousands of pounds over the mortgage term.

In the UK, a typical first-time buyer deposit is 10%. The average deposit value for first time buyers is slightly less as there are first-time buyers who choose to put 5% deposit down or have used the Help to Buy Equity Loan Scheme.

Family Springboard Mortgages

There are also mortgage products that allow you to put down 0% as deposit. These products require a family member to put money in a savings account linked to the mortgage. If you are unable to repay the mortgage, the lender uses the money in the savings account to offset some of the loss.

Where Can My Mortgage Deposit Come From?

Your mortgage deposit can come from almost anywhere providing you have obtained the money legally and can prove to the lender where the money came from.

For example, savings are commonly used for mortgage deposits and a lender will ask you for saving account statements to show the money being paid in and the amount you have saved.

Likewise, investment income can also be used for a deposit providing you show the lender proof of your investment and your investment account balance.

Gifted Deposits

Some first time buyers rely on family to help with deposits in what’s known as a gifted deposit. There are rules about how family members give you money for a deposit and they will need to sign a declaration saying the money is a gift and not a loan of any kind. This is because lenders don’t want to worry about you having additional financial obligations such as repaying your family for the deposit.

A good rule of thumb is as long as you can show a lender where the money came from and the source of the deposit is legitimate, it should be accepted.

Can My Deposit Source be Declined?

Yes, there are several reasons why your mortgage deposit can be declined.

Anti-Money Laundering (AML) Checks

All mortgages are strictly regulated by the Financial Conduct Authority (FCA). Part of these regulations are that a lender must comply with legislation around money laundering.

If a lender has reason to suspect the funds for your deposit were not acquired legitimately they may flag this for money laundering. Likewise, if you can’t show where the money came from or you only have partial accounts to show the source of your deposit, this can also trigger AML flags.

If you have your accounts flagged for money laundering, in extreme circumstances, you may find your assets are frozen until the bank or relevant authority has investigated the source of your funds.

Borrowed Money for a Deposit

If a lender believes you have borrowed money for a deposit it is likely to be declined with most lenders. If any lender allows a deposit sourced from a loan, product options will be few and far between. When parents gift you money, they will sign a gift declaration and shouldn’t expect you to repay the money.

Make sure you communicate this clearly to your parents as lenders will check with them whether they intend to collect repayments on the deposit money.

A misconception is that you can borrow money by using a personal loan for your deposit. Most lenders will not allow you to borrow money for your deposit and borrowing money prior to a mortgage application can hurt your chances of being accepted on the mortgage as it will impact your credit file.

Speak to a Mortgage Expert

There are two main challenges when it comes to your mortgage deposit:

• Collecting enough money for a deposit
• Showing a lender the source of your deposit

A specialist mortgage broker can help with both issues, first by advising the various schemes available to help you save a deposit and secondly, outlining the exact documentation you will need to show a lender.

This means getting a mortgage deposit can be much less hassle compared to trying to guess what a lender wants to see and struggling to save enough for a deposit.

A mortgage broker will also be able to help with finding a lender who will accept your deposit amount. Most lenders will offer better rates for 10% deposit amounts or more, but you should find competitive 5% deposit lenders with a mortgage broker.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage. Boon Brokers provide fee free mortgage advice. Contact Boon Brokers to discuss your deposit and book your mortgage consultation today.