What is a low deposit mortgage?

When you take out a mortgage with a 5% or less deposit, this is known as  a low deposit or high loan to value mortgage. It means that at the start of your mortgage term, the gap between the value of your property and the amount borrowed will be very small.                                      

What are the benefits of having a low deposit mortgage?  

Taking on a low deposit mortgage can get you onto the property ladder sooner. Saving for a mortgage deposit can take time, so the smaller the deposit you pay, the quicker you could buy your first home.

Benefits at a glance:
You could buy your first property sooner.
You don’t need to save a big deposit. 

What are the risks to low deposit mortgages? 

When you take on a low deposit mortgage, the amount you borrow will be very close to the value of the property you purchase. This means that you’ll be at higher risk of negative equity. 

Negative equity is when you owe more on your mortgage than your home is worth. 
 
For example, if you:
1
Bought a house for £200,000.
2
You have £190,000 left to pay on your mortgage.
3
The value of the property then falls to £180,000.
4
This would put you into negative equity.
When your initial mortgage product with us ends, you'll have access to a selection of our other products, even if you have low or negative equity.
Changes in the property market can impact how much your property is worth.  The value of your property could go down as well as up.
Risks of a low deposit mortgage at a glance:
You could go into negative equity.
The property market could negatively impact the value of your property.
At the end of your fixed deal, you may not have access to the best deals.

Are interest rates higher for low deposit mortgages? 

Interest rates on low deposit mortgages will normally be higher. The bigger the deposit you save, the more likely you'll get a lower interest rate. This is because you will have a high loan to value ratio.

How can I avoid the risks of a low deposit mortgage 

There are lots of things you can do to try and protect yourself from the risks of taking out a low deposit mortgage.
Make overpayments on your mortgage to reduce how much you owe.
Check the details of your mortgage deal to learn what you can overpay without incurring early repayment charges.
Make improvements to your property to help increase its value. Be aware that the cost of improvements may outweigh the value added to your home.
Keep a track of property price trends  in the area you wish to purchase.
The content on this page is for reference and is not financial advice.
For impartial financial advice, try MoneyHelper.

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