How much deposit do I need for a mortgage? 95% mortgage – a myth or reality?
That’s the burning question that we are most asked by clients interested in getting a mortgage and the short answer is that it depends on your individual circumstances.
Credit history is an extremely important factor in determining the deposit required and any bad credit registered within the last 6 years then typically at least 20% deposit is required in order to get a mortgage. However if there is any adverse credit registered within the last 2 years then you may have to put as much as 50% deposit down depending on the severity of the bad credit registered against you.
In today’s lending climate, bad credit doesn’t just mean having a CCJ (county court judgment) or Default registered, lender’s credit scoring models will look at the payment profile of secured and unsecured agreements on your credit file and any late payments within the last 12 months (shown as a ‘1’ entry on your credit file) will typically mean getting declined with even a 10% deposit. It is extremely difficult to second guess a lender’s credit score but you may need to put down 15-20% deposit to ensure a good chance of being agreed for a mortgage if you have had late payments within the last 12 months.
We seem to have gone from the sublime to the ridiculous in a very short space of time. 5 years ago lenders were falling over themselves to offer mortgages of 125% of the purchase price whereas today an average deposit requirement is 15% with the majority of lenders.
Technically it is possible to get a mortgage with only 5% deposit but these tend to be offered by only a handful of Building Societies and Banks to existing customers and those with an extremely high credit rating. There are schemes that are dressed up as 95% mortgages but in reality its means that the parents of the applicants depositing a sum of money into a savings account as additional security for the lender. Unless you have rich parents then this probably isn’t an option for the majority of applicants.
Furthermore, lenders price their products according to perceived risk and obviously with the potential for further house price drops, a lender could quite easily find their security in a negative equity position within the first few years. To offset this risk they have set the rates available on 95% mortgage products much higher than those requiring higher deposit and 6.49% fixed for 2 years is one 95% mortgage offering at the moment. Ouch!
To obtain a high credit score you need to have excellent account conduct on your unsecured credit for the last 12 months so you need to be using your credit card (and paying it on time every month) as well as having a loan to show you have the ability to maintain your credit commitments. However, in reality those with credit commitments don’t have the surplus cash to save towards a deposit and those that are saving, can’t afford to have a loan! This is a tongue in cheek comment but in essence it’s the reality of the mortgage market at the moment and what would the majority do without the Bank of Mum & Dad?
10% deposit opens up a little more choice and once more it tends to be many of the Building Societies that are operating in this area but they are still looking for ‘A rated’ credit scores and many lenders set their score card so high, it’s like dangling a carrot as they decline the majority applying at 90% but offer an 85% option instead.
Credit history is one part of the puzzle in determining the level of deposit required but income is a major factor in determining the maximum advance available and hence the amount of deposit that you will actually need. Lenders are now moving towards affordability based calculations but some still use ‘income multiple calculations’ and maximum advance is typically calculated as 3.5 X main applicant’s gross annual salary + 1 X second applicant’s salary or alternatively 3 X Joint gross annual salary.
Mosaic Mortgages are specialists in assisting first time buyers and movers to obtain the most appropriate mortgage for their circumstances. Contact us now to use our whole of market advice service which means that we will advise you which lender is offering the best deal for your individual circumstances even if the recommended lender will only deal with you directly and you have to apply in branch for your mortgage.