Property > Mortgages
How Does My Deposit Size Impact My Mortgage?
Although some lenders might accept the minimum deposit (usually 5%), saving up for larger deposits will generally give you access to a wider range of providers and deals, offering lower interest rates.
Whilst other factors will impact the lender’s decisions, e.g. your salary, credit history etc., for the purpose of this article, we are going to focus purely on the impact of deposit size.
Why Does the Deposit Size Matter to Lenders?
Lenders are concerned with the amount they are lending in proportion to the value of the property – this is known as the loan-to-value ratio. The larger deposit, the less you are asking to borrow and therefore, the lower the potential loss to a lender is if mortgage repayments can’t be made. As a result, you’re likely to get a more competitive mortgage deal with a lower interest rate.
The Impact on Interest Rates
As we’ve outlined, larger deposits tend to attract more competitive rates. It’s best to view this in terms of bands; the higher deposits generally sit in bands with lower interest rates. An example of a band structure is as follows:
Example:
5% deposit = highest interest charged
20% deposit = lower interest charged
40% deposit = lowest interest charged
The Impact on Repayments
A knock-on effect of a larger deposit is lower monthly repayments. By paying off a larger chunk of the property price at the start and securing a lower interest rate, you are also likely to benefit from more affordable monthly repayments.
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