Will a higher deposit get you better mortgage rates | WIS Mortgages
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15th March 2024

Will a higher deposit get you better mortgage rates

Securing the best rates for your mortgage is a smart move that will make it easier, and potentially faster, to pay off over time. One of the main areas where you can impact how the mortgage is set up is the deposit you put down - but could a higher deposit get you a better rate on your mortgage? The relationship between these two factors can significantly impact the overall cost of purchasing a property. This article explores how a higher deposit might influence your mortgage rates.

Understanding Mortgage Rates

Before looking at how the deposit will impact your mortgage rates, let's first discuss the rates themselves. Understanding these details will give you greater insight into what impacts mortgage rates and how your deposit might affect your rates. So, let's take a closer look at what mortgage rates entail:

What Determines Mortgage Rates?

Mortgage rates are influenced by several different factors that are beyond our control, including the Bank of England's base rate, the lender's specific criteria, and broader economic conditions. However, there are a few areas where you can affect these rates. For example, details about your circumstances, like your credit score and the size of the deposit you put down, also play a role in setting mortgage rates.

The Role of the Deposit

A mortgage deposit is the upfront payment a buyer makes towards the purchase price of their home. It's a percentage of the property's value, and the mortgage covers the remaining cost. The deposit amount can directly impact the interest rate offered by lenders. A higher deposit lowers the risk that lenders have to take on the mortgage, and you'll be lending less if you put down a bigger deposit upfront.

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The Link Between Deposit Size and Mortgage Rates

The connection between the deposit size you put down and mortgage rates incorporates a few different things. By learning what is being factored into the rates offered to you, you're in a much better position to see a good deal. The two main areas that link deposit size and mortgage rate include:

Lower Loan-to-Value (LTV) Ratio

A higher deposit results in a lower Loan-to-Value (LTV) ratio, a key factor lenders consider when offering mortgages. LTV is the percentage of the property's value that you're borrowing. For example, if you buy a £200,000 home with a £50,000 deposit, your LTV is 75%. A lower LTV often translates into lower interest rates.

Risk Assessment by Lenders

Lenders view lower LTV ratios as less risky. If a borrower defaults, a property with a lower LTV is more likely to cover the outstanding mortgage in a sale. Consequently, lenders are often willing to offer better rates to borrowers with higher deposits.

The Impact of Higher Deposits Beyond Rates

Managing to put down a higher deposit yields more than just better interest rates. It can provide more favourable terms for your mortgage and a few other perks, such as:

Reduced Monthly Payments

A higher deposit not only potentially reduces interest rates but also leads to smaller loan amounts. This reduction means lower monthly mortgage payments, easing the financial burden over the loan term.

Increased Equity

Purchasing with a higher deposit instantly boosts your equity in the property, providing a stronger financial buffer should house prices fluctuate. It will also help to ensure you don't fall into negative equity at any point.

Access to More Mortgage Products

A higher deposit can open doors to a wider range of mortgage products. Lenders often reserve their most attractive deals for borrowers with substantial deposits. That means that in the future, you could potentially land a better mortgage deal or secure a bigger property.

Balancing Deposit Size and Financial Health

While aiming for a higher deposit is beneficial, it's really important to balance this goal with your overall financial health. Depleting savings or emergency funds might not be the best strategy, so think carefully about how much you can realistically manage for a deposit and don't overstretch your finances.

Long-Term Financial Planning

Prospective buyers should consider their long-term financial plans, including retirement savings and other investment goals, before locking a significant sum into a property deposit.

Government Schemes and Assistance

The UK government offers several schemes, like shared ownership, that can aid buyers with smaller deposits. It's important to understand how these programs work and their eligibility criteria. These schemes can also influence the mortgage rates available to buyers, making it a significant factor in the decision-making process.

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Get the Best Rates With a Higher Deposit

Securing a favourable mortgage rate is a key objective for homebuyers in the UK. A higher deposit can indeed lead to better mortgage rates due to lower LTV ratios and reduced risk for lenders. However, each buyer's situation is unique, and factors like financial stability and long-term goals should be considered. With careful planning and understanding of the market, buyers can make informed decisions about their deposits and mortgage options.

If you're unsure about how much of a deposit you should put down for your mortgage, or would like assistance in choosing the most suitable mortgage product for your needs, please get in touch with our team at WIS Mortgages today.

Frequently Asked Questions

Q. Is a bigger deposit better when setting up a mortgage?

A. The answer to this question depends on your circumstances, as you don't want to overstretch your finances by putting down a deposit you can't afford. However, generally speaking, a higher deposit will mean lower interest rates, better terms and greater equity.

Q. Is a 10% deposit enough for a mortgage?

A. Yes, a 10% deposit is a common amount accepted by lenders. You should expect potentially lower interest rates and more favourable terms - but if you manage to save up for a 15, 20 or 25% deposit these terms should improve further with all else being equal.

As a mortgage is secured against your home or property, it may be repossessed if you do not keep up the mortgage repayments. The Financial Conduct Authority does not regulate taxation advice or commercial buy-to-lets.