First-time buyers are putting down an average deposit of 18% when choosing their first home, based on 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 let you know that how big your down-payment means lower mortgage costs.
How big a deposit do first-time buyers use?
When we talk about first-time buyer mortgages, we quite often focus on 90% and 95% deals – those available to buyers using the smallest deposits.
New data from UK Finance, however, shows that over the last year, first-time buyers on average pay much bigger deposits close to 15% to 18%.
The chart below implies that in December, the typical first-time buyer mortgage was granted at 82.2% loan-to-value (LTV) – meaning the deposit could be 17.8%
Is it worth saving a bigger deposit?
As we’ve explained recently, should you have only a 5% deposit, you may earn big savings over time 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 receive below 90% LTV, however, the gap tightens significantly.
Data released earlier this month by Moneyfacts shows that from 85% to 90% LTV, the main 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% |
Cheapest rates at 80%, 85% and 90% LTV
Of course, you'll be able to obtain a deal at a lower price than the average rates shown above.
The tables below show the least expensive 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 around the minimum or maximum amount you are able to borrow, which we’ve outlined within the table below.
Two-year fixed-rate deals:
| Max LTV | Lender | Initial rate | Revert rate | APRC | Fees | Loan size |
| 80% | Halifax | 1.54% | 4.24% | 3.9% | lb1,495 | lb250k-lb1m |
| 85% | Halifax | 1.57% | 4.24% | 3.9% | lb1,495 | lb250k-lb1m |
| 90% | HSBC | 1.79% | 4.19% | 3.9% | lb999 | lb10k- lb400k |
Five-year fixed-rate deals:
| Max LTV | Lender | Initial rate | Revert rate | APRC | Fees | Loan size |
| 80% | Halifax | 1.98% | 4.24% | 3.5% | lb1,495 | lb250k-lb1m |
| 85% | Halifax | 2.04% | 4.24% | 3.6% | lb1,495 | lb250k-lb1m |
| 90% | HSBC | 2.29% | 4.19% | 3.6% | lb999 | lb10k- lb400k |
Note: All mortgage data sourced from Moneyfacts. 18 February 2022. At 90% LTV on a five-year fix, Atom Bank offers a lower initial rate of 2.24% (4%/3.4%/lb1,200), but this is just available on loans of above lb350,000. For comparative purposes within the calculations below, we’ve instead selected the HSBC deal.
How will the LTV affect your home loan repayments?
There might not seem to be much difference between paying interest at 1.98% rather than 2.04%, but the big real question is how much your monthly mortgage payments is going to be.
Below, we’ve calculated example mortgage repayments based on these deals at 80%, 85% and 90% LTV.
For comparative purposes, we’ve assumed you’re buying a home worth lb320,000, 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 2 years |
| 80% | lb256,000 | lb64,000 | lb888 | lb23,070 |
| 85% | lb272,000 | lb48,000 | lb948 | lb24,494 |
| 90% | lb288,000 | lb32,000 | lb1,035 | lb25,877 |
Five-year fix:
| LTV | Mortgage size | Deposit required | Monthly payment (initial period) | Amount paid in two years |
| 80% | lb256,000 | lb64,000 | lb944 | lb24,393 |
| 85% | lb272,000 | lb48,000 | lb1,011 | lb26,004 |
| 90% | lb288,000 | lb32,000 | lb1,107 | lb27,611 |
Savings as high as lb100 a month
As the chart below shows, the main difference between getting a loan at 85% and 80% LTV is about lb60 a month, on two and five-year fixes.
The biggest gap, however, is seen when moving from the 90% LTV deal to an 85% deal, enabling you to save nearly lb100 a month.
Is it worth saving for extended?
In our example, moving down a LTV bracket required saving an extra lb16,000 for your deposit, which isn’t always achievable.
So ultimately, how much you need to save is determined by two key things: your financial circumstances and where you’re purchasing the home.
For example, if you’re buying a home worth lb150,000, you’d only have to save an extra lb7,500 to move down a bracket, meaning the lower rates could be well worth the extra time and effort.
But if you’re buying in an expensive area where costs are growing quickly, you may find a larger deposit impossible to develop.
Should I avoid buying having a 5% deposit?
If you’re looking over this and looking at the attractive rates available on 80%, 85% and 90% mortgages, you might be worried you’ll find it difficult to obtain a good deal with a 5% deposit.
But while there are advantages of saving more, it is currently easy to have an attractive deal on the 95% mortgage.
As we explained last week, rates on 95% mortgages have dropped by a lot more than 0.5% in the past six months, as providers battle for custom from buyers with smaller deposits.
Advice in your mortgage options
If you’re thinking of buying the first home, it can be useful to take advice from the large financial company, who can assess what you can afford and discover the right mortgage for the circumstances.
