The 5% Myth: the truth about first-time buyer deposits

Did you know that, on average, first-time buyers (FTBs) put down a deposit of around 15% when buying a home? And in fact, around 45% of FTBs actually put down a deposit between 10% and 20%. You might wonder why, when some lenders offer mortgages with as little as a 5% deposit or even 0% deposit.

Let me break it down for you. When a lender gives someone a mortgage, they look at various things to figure out how risky the loan might be. One big risk is that the borrower might not pay back the loan on time. Another risk is if the value of the home drops (either because of a falling market or even because the home has not been kept in good repair). That's why for most mortgages, you are expected to provide a deposit.

If you have a bigger deposit, the lender sees it as less risky. They know that even if the value of your home drops, they can still get their money back by selling it. And therefore, if you have a smaller deposit, it's harder for the lender to recover all of their loan, hence why those loans are a bigger risk for them. This is where things get a bit more complicated.

You see, there are rules set by the regulators who oversee lenders. And they have set limits on the number of riskier loans that lenders can issue. They do this to make sure that lenders don't take too many big risks, because that's not good for business. So, even though lenders advertise mortgages with smaller deposit requirements, they can only approve those higher risk loans for a small number of people. Everyone else will need to provide a bigger deposit.

Just because low- or no-deposit mortgages are advertised, it doesn't mean that everyone who applies for them will get them. A bit crappy, I know, because it lulls you into thinking as long as you have saved a 5% deposit you'll be able to get a mortgage, but in reality, that is not the case.

Let's sprinkle a bit of positivity here because there are actually some big advantages to putting down a bigger deposit:

1. Lower Interest Rates: Riskier loans come with higher interest rates. So with a bigger deposit, you'll pay less interest over the life of your mortgage because yours will be seen as a safer bet for the lender and so they charge lower interest rates on lower risk loans
2. More Choices: Many more lenders offer mortgage products that need bigger deposits, giving you more room to choose the best deal. And to win your business from the competition, many lenders also offer additional incentives like zero product fees and covering valuation and/or legal costs and in some cases, even cashback!
3. Lower Monthly Payments: When you borrow less, your monthly payments are lower too.
4. Possibility of Paying Off Faster: With lower monthly payments, you might even be able to pay off your mortgage sooner. Imagine being mortgage free!

Remember, because house prices vary widely across the country, a 15% deposit might not even be that large, especially more affordable areas. But, obviously less so in other areas. To maximise your chances, when you get to the 5% deposit milestone, keep going. A higher deposit not only boosts your chances of getting a mortgage approval but also strengthens your position when making an offer.

Empowering you with knowledge, one mortgage decision at a time.