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Getting a mortgage is often the biggest financial commitment we make in our lives, and if you’re a first-time buyer, it can seem overwhelming.
In this simple guide, we will answer your questions, giving you the confidence to take your first steps towards getting a mortgage and becoming a home-owner.
What is a mortgage deposit?
The deposit is the amount of your own money you put towards buying a home.
Very few people can afford to buy property outright, but many of us can save a percentage, with the rest covered by a mortgage.
Do I need a big deposit to get a mortgage?
You will need at least a 5% deposit in most cases, which means a 95% mortgage.
According to the Office for National Statistics, the average UK house price in October 2021 was £268,000*, so a 5% deposit would be £13,400.
However, if you have a bigger deposit, you are more likely to be offered lower interest rates.
Mortgage lenders take into account how much you need to borrow compared to the price of the property you are buying, known as the loan-to-value ratio, or LTV. The bigger the deposit you contribute, the smaller the proportion of the price you need to take as a mortgage.
Different lenders have different approaches, but you may see a significant drop in interest rates if you have a 25% deposit, which means an LTV of 75%, rather than a 5% deposit – 95% LTV.
Use the TSB mortgage calculators to see how the size of your deposit affects interest rates.
According to the Office for National Statistics, the average UK house price in October 2021 was £268,000*, so a 5% deposit would be £13,400.
However, if you have a bigger deposit, you are more likely to be offered lower interest rates.
Mortgage lenders take into account how much you need to borrow compared to the price of the property you are buying, known as the loan-to-value ratio, or LTV. The bigger the deposit you contribute, the smaller the proportion of the price you need to take as a mortgage.
Different lenders have different approaches, but you may see a significant drop in interest rates if you have a 25% deposit, which means an LTV of 75%, rather than a 5% deposit – 95% LTV.
Use the TSB mortgage calculators to see how the size of your deposit affects interest rates.
18+ and UK resident only. Subject to status and lending criteria.
Can I still get a good mortgage rate with a low deposit?
First time buyers of new-build homes may qualify for Help to Buy, which offers a loan of up to 20% (up to 40% in London) of the property value to top up your deposit. It’s interest-free for five years, but the amount you repay may vary depending on the value of your home when you repay your Help to Buy loan - click here for our simple guide to how it works.
If you have saved up a 5% deposit, and take out a 20% Help to Buy loan, then the LTV for your mortgage will be 75%, which should give you access to more competitive mortgage deals**.
The government’s Mortgage Guarantee Scheme supports lenders to offer more competitive interest rates to buyers with 5% deposits - click here to find out more.
Who sets mortgage rates?
Lenders set their own mortgage rates, but they are influenced by the Bank of England base rate. Many mortgage deals are directly linked to it, either by tracking it, or being fixed at a certain level above it - click here for more information.
Whether you have a fixed rate or a tracker mortgage, most lenders offer a discounted introductory rate.
It is usually a good idea to remortgage when your introductory rate ends - click here for a simple guide to remortgaging
How much can I borrow?
Traditionally, you were able to borrow a multiple of your income to buy a home - for example 4.5 times your annual salary.
These days lenders will not only consider your income, but also your outgoings and financial commitments, such as childcare costs, loans or car finance, to check you will be able to afford your mortgage payments now and should interest rates rise in future.
The TSB mortgage calculator will give you an indication of how much you may be able to borrow from TSB.
These days lenders will not only consider your income, but also your outgoings and financial commitments, such as childcare costs, loans or car finance, to check you will be able to afford your mortgage payments now and should interest rates rise in future.
The TSB mortgage calculator will give you an indication of how much you may be able to borrow from TSB.
18+ and UK resident only. Subject to status and lending criteria.
Should I take the mortgage with the lowest interest rate?
The interest rate is one of the most important factors when you consider a mortgage, but it is not the only one. Make sure you look at other costs such as arrangement fees or charges for overpayments or early repayments to give you an idea of the overall cost of buying your home.
How can I get a better mortgage rate?
The size of your deposit will influence your mortgage rate, but lenders will also take into account the length of the mortgage, the type of property you would like to buy and your credit history.
Can I get a mortgage with a bad credit score?
Lenders want to be confident that you will meet your mortgage payment every month, and a solid credit history is one of the best indicators of that.
If your credit rating is poor, the lender will consider there is a higher risk you may default, so if they offer you a mortgage, they are likely to charge a higher interest rate to make up for that.
To boost your credit score, avoid any missed or late payments on existing credit agreements, including your mobile phone contract, make sure you are not using too much of your available credit and try to minimise the amount of new credit applications you make.
You also need to make sure you are on the Electoral Register at your address.
If your credit rating is poor, the lender will consider there is a higher risk you may default, so if they offer you a mortgage, they are likely to charge a higher interest rate to make up for that.
To boost your credit score, avoid any missed or late payments on existing credit agreements, including your mobile phone contract, make sure you are not using too much of your available credit and try to minimise the amount of new credit applications you make.
You also need to make sure you are on the Electoral Register at your address.
*https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/october2021
** This refers to the HTB Equity Loan scheme operating in England and HTB – Wales. Please check your local government website for what scheme operates in your area.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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