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First-time buyers: will a bigger deposit cut your mortgage repayments?
First-time buyers are putting down an average deposit of 18% when purchasing their first home, according to new data from UK Finance.
But with the cost of mortgages for buyers with small deposits dropping significantly in recent months, is saving a bigger deposit worth the effort?
Here, we explain how the size of your down-payment translates into lower mortgage costs.
How big a deposit do first-time buyers use?
When we talk about first-time buyer mortgages, we often focus on 90% and 95% deals - those available to buyers with the smallest deposits.
New data from UK Finance, however, shows that over the last year, first-time buyers on average put down much bigger deposits of around 15% to 18%.
The chart below shows that in December, the average first-time buyer mortgage was granted at 82.2% loan-to-value (LTV) - meaning the deposit would be 17.8%
Is it worth saving a bigger deposit?
As we've explained recently, if you only have a 5% deposit, you could make big savings in the long run by waiting until you have enough for 10% - with average rates at 90% LTV around 0.7% cheaper than those at 95% LTV.
Once you get below 90% LTV, however, the gap tightens significantly.
Data released earlier this month by Moneyfacts shows that from 85% to 90% LTV, the difference between average rates is just 0.19%, while from 80% to 85%, it's only 0.04%.
| Max LTV | 80% | 85% | 90% | 95% |
| Average rate | 2.46% | 2.50% | 2.69% | 3.41% |
Source: Moneyfacts. 8 February 2019.
Cheapest rates at 80%, 85% and 90% LTV
Of course, it is possible to get a deal at a lower price than the average rates shown above.
The tables below show the cheapest introductory rates currently available at 80%, 85% and 90% loan-to-value on two-year and five-year fixed-rate terms.
One note of caution - some of the cheapest rates put limits on the minimum or maximum amount you can borrow, which we've outlined in the table below.
Two-year fixed-rate deals:
Five-year fixed-rate deals:
Note: All mortgage data sourced from Moneyfacts. 18 February 2019. At 90% LTV on a five-year fix, Atom Bank offers a lower initial rate of 2.24% (4%/3.4%/£1,200), but this is only available on loans of above £350,000. For comparativepurposes in the calculations below, we've instead selected the HSBC deal.
How does the LTV affect your mortgage repayments?
There may not seem to be much difference between paying interest at 1.98% instead of 2.04%, but the big question is how much your monthly mortgage payments will be.
Below, we've calculated example mortgage payments based on these deals at 80%, 85% and 90% LTV.
For comparative purposes, we've assumed you're buying a home worth £320,000, and are taking out a mortgage over a 30-year term.
Two-year fix:
| LTV | Mortgage size | Deposit required | Monthly payment (first two years) | Amount paid in two years |
| 80% | £256,000 | £64,000 | £888 | £23,070 |
| 85% | £272,000 | £48,000 | £948 | £24,494 |
| 90% | £288,000 | £32,000 | £1,035 | £25,877 |
Five-year fix:
| LTV | Mortgage size | Deposit required | Monthly payment (initial period) | Amount paid in two years |
| 80% | £256,000 | £64,000 | £944 | £24,393 |
| 85% | £272,000 | £48,000 | £1,011 | £26,004 |
| 90% | £288,000 | £32,000 | £1,107 | £27,611 |
Savings of up to £100 a month
As the chart below shows, the difference between taking out a loan at 85% and 80% LTV is around £60 a month, on both two and five-year fixes.
The biggest gap, however, is seen when moving from a 90% LTV deal to an 85% deal, where you could save nearly £100 a month.
Is it worth saving for longer?
In our example, moving down a LTV bracket required saving an extra £16,000 for your deposit, which isn't always achievable.
So ultimately, how much you should save will depend on two key things: your financial circumstances and where you're buying the home.
For example, if you're buying a home worth £150,000, you'd only need to save an extra £7,500 to move down a bracket, meaning the lower rates could be worth the extra time and effort.
But if you're buying in an expensive area where prices are growing quickly, you may find a larger deposit impossible to build up.
Should I avoid buying with a 5% deposit?
If you're reading this and looking at the attractive rates available on 80%, 85% and 90% mortgages, you might be worried you'll struggle to get a good deal with a 5% deposit.
But while there are benefits of saving more, it is currently possible to get an attractive deal on a 95% mortgage.
As we explained last week, rates on 95% mortgages have dropped by more than 0.5% in the past six months, as providers battle for custom from buyers with smaller deposits.
Advice on your mortgage options
If you're thinking of buying your first home, it can be helpful to take advice from a mortgage broker, who can assess what you can afford and find the right mortgage for your circumstances.
