Saving for a deposit (and your ‘LTV’)
You can buy with a 5% deposit, but that’s where rates are at their highest and lending rules at their strictest. If you can get to a 10% deposit, that will make a real impact on those rates and rules.
That’s because if you have a bigger deposit, lenders need to lend you less money – which they like because that means less risk for them. So lenders will reward bigger deposits with lower interest rates for you.
If you’re struggling with a deposit, you can explore schemes like shared ownership and Help to Buy.
Some lenders will want to see evidence (like bank statements) of how you saved your deposit.
What is LTV?
LTV means loan to value – it’s the size of your mortgage as a percent of the total property value.
Example: Say you want to buy a property worth £250,000. You have a deposit of £20,000 already, so you need to take out a mortgage of £230,000.
That makes your LTV:
230,000 / 250,000 = 0.92
x 100 = 92%
The higher your deposit, the lower your LTV. So if you put down a 10% deposit on your home (without using any schemes to buy it) that’s a 90% mortgage, or 90% LTV.
Help from your parents
Your parents can lend you money for the deposit, gift you money, and act as loan guarantors. A tiny handful of lenders even let you take out a 100% loan on a property, if your loved ones provide 10% of the price as a security.
Be warned that some lenders won’t accept borrowers who are using a loan to fund their purchase, even if that loan is from their parents. That’s why a gift that doesn’t need to be repaid can be better – some lenders will need to see a letter from your parents saying the gift is actually a gift! A broker can help you figure out where to apply.
Your credit score
Your credit record is the history of how you’ve managed your money in the past. It’s written up as your credit report, and summarised in one number: your credit score.
Before they agree to lend money to you, a lender will run a credit check on you to read your report and see your score. This will only ever be with your permission, and after they’ve already run their basic affordability checks.
They’ll get to explore things like your debts, store cards and credit cards you’ve opened, where you’ve applied for loans before, whether and how you paid all those back… almost everything you’ve done that’s to do with credit (ie borrowing money).
It’s worth checking your report yourself, before you approach lenders for a mortgage. Sometimes tiny mistakes in there, like a wrong address history, can pull down your credit score – but these are fixable.
Credit reports are worked out by credit reference agencies, or CRAs. There are three of these in the UK – Experian, Equifax and TransUnion (previously CallCredit). It’s worth getting a report from all three, as each is worked out a little differently. A mortgage broker will be able to help you understand your credit report if that would be useful.
Once you get it, work through this credit score checklist to make sure your score is as good as it can be before you apply for a mortgage.