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.
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%
As we've , 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%.
Source: Moneyfacts. 8 February 2019.
Of course, it is possible to get a deal at a lower price than the average rates shown above.
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.
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.
|LTV||Mortgage size||Deposit required||Monthly payment (first two years)||Amount paid in two years|
|LTV||Mortgage size||Deposit required||Monthly payment (initial period)||Amount paid in two years|
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.
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.
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.
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.