How does a smaller deposit affect mortgage offers?

Home budget, family finance with piggy bank

Ask the expert at Smith and Pinching about the new 5pc mortgage deposit scheme - Credit: Getty Images/iStockphoto

My boyfriend and I have been saving for a deposit to buy a small house or flat and have managed to put enough together for a 10pc deposit – but we have read that mortgages can now be provided with just 5pc and a government guarantee. Should we keep the rest of our money for furniture or would it be better to use the whole 10pc as a deposit at this stage?

Diane Fish, mortgage and equity release adviser with Smith & Pinching

Diane Fish, mortgage and equity release adviser with Smith & Pinching - Credit: Smith & Pinching

Diane Fish of Smith & Pinching responds:

It is certainly the case that mortgage lenders are beginning to offer loans with deposits at as little as 5pc. These are available not only as part of the mortgage guarantee scheme introduced by the government in its March 2021 Budget but also from other lenders, giving those with small deposits a reasonable choice of provider. However, the important thing to know is that interest rates on a low deposit mortgage tend to be higher than rates for mortgages with larger deposits and the range of deals available will increase if you have a larger deposit.

The government scheme offers a guarantee to the lender in the event of them having to force the sale of your property and it generating less than their investment in it – known as negative equity. If you were unable to pay, forcing repossession, the lender would call upon the guarantee to fill any shortfall. It’s important to understand that the aim of the scheme is not to pay your mortgage for you, nor will it prevent repossession if you can’t make your repayments.

When you apply for a mortgage, the lender will base what they offer on what you can afford to repay – and smaller deposits will normally mean larger repayments.

Finding the right mortgage for you is a delicate balance of what you need to borrow and what you can afford to repay each month. I recommend that you speak with an independent mortgage adviser to get an understanding of what is available to you and what difference a smaller deposit may make to your repayments.

Your home may be repossessed if you do not keep up payments on your mortgage. There will be a fee for the mortgage advice. The precise amount will depend upon your circumstances, and the type of lending taken. Smith & Pinching’s minimum mortgage advice fee is £700. Any opinions expressed in this article do not constitute advice.

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