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MORTGAGE DEPOSITS
Your deposit affects how much of a property’s purchase price needs to be funded by a mortgage. It also affects the loan-to-value of the mortgage, commonly known as LTV.
Understanding the relationship between the property price, your deposit and the mortgage required can help you make sense of the mortgage options you may encounter.
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THE BASICS
How do the property price, deposit and mortgage fit together?
When buying a property with a mortgage, the purchase is generally funded through a combination of your deposit and mortgage borrowing.
PROPERTY PRICE
The price of the property
The agreed purchase price provides the starting point for considering how the purchase will be funded.
DEPOSIT
Money provided towards the purchase
The deposit is the part of the purchase price that is not being funded by the mortgage.
MORTGAGE
Mortgage required
The remaining amount is the mortgage borrowing required to complete the purchase.
The deposit and mortgage together fund the purchase
The size of the deposit affects both the amount that needs to be borrowed and the resulting loan-to-value.
LOAN-TO-VALUE
What does loan-to-value mean?
Loan-to-value compares the amount of mortgage borrowing with the value of the property. It is usually expressed as a percentage and is commonly shortened to LTV.
MORTGAGE AMOUNT
PROPERTY VALUE
ILLUSTRATIVE EXAMPLE
PROPERTY PURCHASE
Property value
£300,000
Deposit
£60,000
Mortgage
£240,000
LOAN-TO-VALUE
£240,000
£300,000
× 100
=
80% LTV
PROPERTY VALUE — £300,000
80%
MORTGAGE BORROWING
£240,000
LTV describes the mortgage as a proportion of the property’s value
A higher LTV means a larger proportion of the property’s value is being funded by the mortgage. A lower LTV means a smaller proportion is being funded by the mortgage.
LTV does not by itself determine whether a mortgage application will be accepted.
DEPOSIT SIZE
How does the size of your deposit change LTV?
As the deposit represents a larger proportion of the property’s value, the amount that needs to be funded by the mortgage becomes a smaller proportion of the value.
SAME PROPERTY VALUE — DIFFERENT DEPOSIT SIZES
ILLUSTRATIVE ONLY
SMALLER DEPOSIT
10% DEPOSIT / EQUITY
90%
MORTGAGE BORROWING
90% LTV
A larger proportion of the property value is funded by the mortgage.
MID-RANGE DEPOSIT
20% DEPOSIT / EQUITY
80%
MORTGAGE BORROWING
80% LTV
The deposit represents a larger share of the property value and the mortgage represents a smaller share.
30% DEPOSIT / EQUITY
70%
MORTGAGE BORROWING
Deposit size and affordability are different questions
A larger deposit reduces the proportion of the property’s value being funded by the mortgage, but the lender will still assess whether the mortgage is affordable and whether the application meets its lending criteria.
MORTGAGE OPTIONS
Why can loan-to-value matter?
Lenders can use loan-to-value as one part of deciding which mortgage products and lending terms may be available.
01
Product availability
Mortgage products can have maximum loan-to-value limits, so the LTV can affect which products may be available.
02
Interest rates
Interest rates can vary between mortgage products at different loan-to-value levels.
03
Lender criteria
Lenders apply their own criteria when deciding the loan-to-value levels at which they are prepared to lend.
04
The wider application
Loan-to-value is only one part of the mortgage decision. Affordability, credit history, the property and other factors can also be relevant.
LTV is important, but it is not the whole mortgage decision
A lender can consider loan-to-value alongside affordability, the property and the wider mortgage application.
Two applications with the same LTV can therefore have different outcomes depending on the circumstances and the lender’s criteria.
YOUR DEPOSIT
Where can a mortgage deposit come from?
The source of a deposit can be relevant because lenders, solicitors and other parties involved in the transaction may need to understand where the money has come from.
01
Personal savings
Money you have accumulated from income or other personal resources.
02
Sale of another property
Equity released through the sale of an existing property may form part or all of the deposit for another purchase.
03
Gifted deposit
Some buyers receive money towards a deposit as a gift from another person.
04
Other sources
Other sources may be possible depending on the circumstances and the requirements of the lender and conveyancer.
What is a gifted deposit?
A gifted deposit is money given towards a property purchase rather than money the buyer is expected to repay as borrowing.
The lender and conveyancer may need information about the person providing the gift, the source of the money and whether any repayment, ownership interest or other conditions are attached to it.
GIFT
Money provided towards the purchase without an expectation that the buyer will repay it as borrowing.
VERSUS · BORROWING
Money the buyer is expected to repay, which may be treated differently when the mortgage application is assessed.
The source of the deposit may need to be understood
The parties involved in the mortgage and property transaction may need information about where the deposit has come from before the purchase can proceed.
PROPERTY VALUATION
The price agreed between buyer and seller and the value used by a mortgage lender are not necessarily the same thing.
If the lender’s valuation differs from the agreed purchase price, the relationship between the borrowing requested and the property value used in the mortgage assessment may also differ.
AGREED PURCHASE PRICE
The price agreed for the purchase
This is the price agreed between the buyer and seller for the property transaction.
VS
LENDER’S VALUATION
The value used by the lender
The lender may obtain a valuation of the property as part of its mortgage assessment.
BOTH CONSIDERED WITHIN
MORTGAGE ASSESSMENT
The lender considers the property value alongside the borrowing
The valuation can affect how the lender considers the relationship between the mortgage requested and the property value.
ILLUSTRATIVE EXAMPLE
AGREED PURCHASE PRICE
VS
LENDER’S VALUATION
£15,000 DIFFERENCE
Why could this affect the mortgage?
The lender’s valuation can affect the property value used when it considers the mortgage and loan-to-value.
If the valuation is different from the purchase price, the amount of deposit or other funds needed to complete the purchase may also need to be considered.
The purchase price and lender’s valuation serve different purposes
The purchase price is the amount agreed for the transaction. The lender’s valuation forms part of the lender’s own assessment of the property and mortgage application.
YOUR DECISION
A larger deposit reduces the amount that needs to be funded by the mortgage and lowers the resulting loan-to-value. But deciding how much money to use as a deposit can involve wider financial considerations.
The largest deposit you could provide is not automatically the right amount for you to use.
USING MORE AS A DEPOSIT
Putting more money towards the purchase
LOWER MORTGAGE REQUIRED — A larger deposit reduces the amount that needs to be funded by the mortgage.
LOWER LOAN-TO-VALUE — A larger deposit represents a greater proportion of the property value, resulting in a lower LTV.
MONEY USED FOR THE PURCHASE — Money committed to the deposit is being used towards the property purchase rather than retained for another purpose.
RETAINING MONEY ELSEWHERE
Keeping some money outside the deposit
MONEY REMAINS AVAILABLE — Money not used for the deposit remains available for other purposes.
LARGER MORTGAGE REQUIRED — Using a smaller deposit means a larger proportion of the purchase price needs to be funded by the mortgage.
HIGHER LOAN-TO-VALUE — A smaller deposit results in a higher LTV than using more of the same money as a deposit.
THE DECISION
Your deposit decision
The amount you choose to use as a deposit can depend on both the mortgage and your wider financial circumstances.
WIDER FINANCES
Money retained for other purposes
The largest possible deposit is not automatically the right answer
Using more money as a deposit may reduce the mortgage required and the resulting LTV, while retaining some money may preserve financial flexibility. The appropriate balance depends on the individual circumstances.
A mortgage adviser can consider the mortgage options alongside your circumstances and objectives.
BEFORE YOU APPLY
Before applying for a mortgage, it can be useful to understand how your deposit fits with the property purchase, the mortgage required and your wider circumstances.
01
How much deposit do you currently have available?
Consider the money available for the purchase and where it has come from.
02
How much of your available money do you want to use as a deposit?
The amount available and the amount you choose to use are not necessarily the same.
03
What property price are you considering?
The property price, deposit and mortgage required are directly connected.
04
What loan-to-value would result from the deposit?
LTV compares the mortgage borrowing with the value of the property.
05
Could the source of your deposit require further information?
Lenders and conveyancers may need to understand where deposit money has come from.
06
What money would remain after the property purchase?
Consider the deposit alongside the other financial demands associated with buying and owning the property.
COMMON QUESTIONS
Common questions about mortgage deposits and loan-to-value.
MORTGAGE GUIDES
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