How to buy your first home with a small deposit
If you’re looking to buy your first home but feel that your deposit is too small to get started, you’re not alone. Thousands of current homeowners have been in the exact same situation so don’t lose hope. We’re going to talk you through exactly what you need to do to get your first foot on the property ladder – even if you’ve got a small deposit.
What is a mortgage deposit?
First things first – a mortgage deposit is a lump sum amount of money that you pay up front when you’re buying a house. It will usually need to be at least 5% of the value of the property you’re hoping to buy. And the bigger your deposit, the smaller the mortgage you’ll need to take out to pay for the rest of the house’s value.
Our borrowing calculator can give you an idea of how much you can borrow based on your deposit.
How can I save for a deposit?
This is normally the bit that tends to worry people – but with a few simple tips and tools, you’ll have enough to put down sooner than you might think. Here are a few steps you can take to get started.
Slash your spending
If you’re committed to buying your first home, ensure you’re doing everything you can to save as much as possible towards your deposit. We know you’ve probably heard this one before – but it bears repeating because it’s important! It’s also worth noting that cutting down on unnecessary spending has the added benefit of showing lenders you’re sensible with your money too!
If you don’t know where to start, try some of the following:
- Create a separate savings pot – If you want to make sure you’re saving money and not touching it then a separate savings pot/account is a good place to start.
- Make use of price comparison websites – Whether its utility bills, insurance, or even your weekly food shop, price comparison websites can help you save hundreds of pounds.
- Download a saving/budgeting app – Saving is so much easier when you don’t have to do anything at all. Try downloading a saving/budgeting app like Plum or Yolt that does the hard work for you. These apps have features that round up your spending to the nearest pound and deposit the difference into a separate savings pot.
If you need a bit more help managing your finances, check out our budget calculator.
Make your savings work for you
In addition to saving up your money, it’s equally important to make sure you’re saving in the right places. Saving into a Lifetime ISA is a brilliant way to boost your savings when you’re buying your first home. Okay, so how do they work?
- You can put in up to £4,000 each year - until you’re 50 years old.
- The government will add a 25% bonus to your savings - up to a maximum of £1,000 per year.
- You can save lump sums - you don’t need to commit to saving each month.
There are some rules you should be aware of first though. For example, you must be over 18 years old but under 40 to open a Lifetime ISA. The money can also only be used for a first home or saved for later life.
What should I do if I have a small deposit?
The good news is that there are options available to you. The Help to Buy Equity Loan scheme allows potential homeowners to purchase a new build home with just a 5% deposit if you’re a first-time buyer.
How does it work?
- The government will lend you up to 20% of the cost of your new build home. You can be lent up to 40% if the property you’re buying is in London. This is called an equity loan.
- You’ll need to save a minimum of 5% of the purchase price as a deposit. You can use any money you’ve saved up in your Help to Buy ISA or Lifetime ISA for your house deposit. The remaining amount of up to 75% comes from a specialist Help to Buy mortgage product.
- The equity loan is interest-free for the first five years and you don’t need to make any repayments on it during that time.
The original Help to Buy Equity Loan scheme runs until 31 March 2021. Applications for this scheme closed on 15 December 2020.
However, a new Help to Buy Equity Loan scheme set to replace it starts 1 April 2021. This scheme will run until March 2023. The new scheme introduces two major changes:
- It is only open to first-time buyers (if you’re buying for the first time then this won’t affect you).
- Regional price caps have been introduced - the value of the property you can buy through the new scheme will vary depending on where you want to live. They range from £186,100 in the North East up to a maximum of £600,000 in London.
You may also want to consider Shared Ownership. This scheme allows you to buy a share of a property and pay rent on the rest. You'll only need a mortgage for the share you’re buying so you’ll need a much smaller deposit.
Take a look at our expert advice article on shared ownership here.
Improve your credit score
When you apply for a mortgage, the mortgage lender will take a look at your credit ratings to decide whether to lend to you, how much to lend you, and sometimes how much interest to charge too.
Improving your credit score will increase your chances of having your mortgage application accepted. If you have a small deposit, your mortgage lender will have to loan you a larger amount of money. If you were lending someone a large amount of money, you’d want to be fairly certain they’d be able to pay it back.
You have to make sure you’re seen as financially reliable to be eligible for a mortgage.
The first step is to check your current credit scores. There are three main credit agencies that hold credit reports on you. These are Experian, Equifax and TransUnion. It’s a good idea to check all three reports. Go through them carefully. If you spot any mistakes, it’s very important to get these corrected.
If you have a fairly low credit score, make sure you take steps to improve it. These include using a credit card responsibly, ensuring you don’t pay any bills late, and making sure you’re on the electoral roll.
Speak to a mortgage adviser
Finally, if you have a small deposit and want to buy your first home it’s a good idea to get the right advice from the right people. Our award-winning team of expert mortgage advisers have access to over 12,000 mortgages from over 90 different lenders. We even have access to exclusive offers and products that can’t always be found on the high street, so we’re always in a great position to find the right mortgage for you.
Because we play by the book we want to tell you that…
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances.
The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.