Mortgage and deposits explained
In this guide
What is a mortgage?
When you buy your first home, it’s important to understand what a mortgage is. A mortgage is a big financial commitment - one that lasts a long time and comes with some risks. You need to be confident you can afford your repayments now and in the future.
Put simply, a mortgage is a loan. It's a sum of money you borrow from a lender to buy a home. But there are two things that make a mortgage different from other types of loans you might know about.
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The loan is tied to your home
A mortgage is what's called a 'secured' loan. In return for lending you a large sum of money, the lender uses the property you buy as security. If you're unable to make your regular repayments, your lender has the right to repossess your home and sell it to recover the money you borrowed from them.
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The loan takes a long time to repay
Mortgages are paid back (with interest) over a long period of time - known as the 'term' of your mortgage. Mortgage terms are typically around 25 - 30 years, so even if the interest rate on your mortgage is low, you'll still pay a lot for it over time.
What is a deposit?
A deposit is a lump-sum you pay upfront towards the property you want to buy. Your mortgage covers the rest. Lenders typically ask for deposits for two reasons:
- As proof of your financial discipline and your commitment to the purchase
- To reduce the risk they take on when lending you a mortgage
Why do you need a deposit?
A mortgage is a secured loan; the amount you borrow is ‘secured’ against the property you buy. That means if you don’t repay your mortgage, the property goes to the lender so they can recover the cost of the loan you borrowed from them.
When a bank or building society lends a mortgage, they’re essentially taking a risk that house prices won’t go down. Let’s imagine you’d just bought a £200,000 house using a £200,000 loan.
If house prices dropped dramatically and you fell behind on your payments, the lender would be out of pocket. That’s because even if they took the property back from you, it'd be worth less than the amount of money they lent you to buy it. That’s why lenders ask for a deposit.
How much should you save for your deposit?
If you pay a 10% deposit, house prices would need to drop by 10% before your lender wouldn’t be able to cover the full amount of the loan (if you weren’t able to pay it back).
So the bigger your deposit, the less risky it is for lenders to provide you with a mortgage.
The size of your deposit matters because it can impact how good a deal you can get on your mortgage when you're ready to apply.
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