Is a 5% or 10% deposit better for first-time buyers?

Buying your first home is a huge milestone, but one of the earliest questions you’ll face is how much deposit to save. Many first-time buyers in the UK are torn between aiming for a 5% or 10% deposit. Deciding between these two can be a balancing act, especially when you’re trying to weigh affordability against long-term financial benefits.

In this guide, we’ll break down the pros and cons of both 5% and 10% deposits and what each option could mean for your mortgage, monthly repayments, and overall home-buying journey.

Why your deposit size matters

Your deposit size doesn’t just impact the amount you need upfront; it also influences your mortgage terms, the range of lenders willing to work with you, and the interest rate you’ll receive. Generally, a higher deposit reduces the risk for lenders, making it easier to secure a lower interest rate, which can save you thousands over the life of the loan.

Learn more: First time buyer mortgages

Understanding loan-to-value ratio (LTV)

Before diving into 5% vs 10%, it’s helpful to understand the concept of Loan-to-Value ratio (LTV). LTV represents the percentage of the property’s value that you’ll borrow from a lender. A 5% deposit means a 95% LTV, while a 10% deposit results in a 90% LTV. Lower LTVs often come with better mortgage deals, so even a small increase in deposit size can yield more attractive mortgage options.

The benefits of a 5% deposit

Opting for a 5% deposit can be appealing if you’re eager to get onto the property ladder sooner rather than later, especially given rising house prices.

Pros of a 5% deposit:

Lower upfront cost: A smaller deposit means less time spent saving, allowing you to purchase a home sooner.

Government schemes: Several UK government schemes, such as the Mortgage Guarantee Scheme, support 95% mortgages, making this option more accessible.

Homeownership sooner: For many, getting on the property ladder as soon as possible outweighs the cost of a higher LTV mortgage.

Cons of a 5% deposit:

Higher interest rates: With a 95% LTV, you’ll often face higher interest rates, meaning larger monthly repayments.

Limited mortgage options: Not all lenders offer 95% LTV mortgages, so your options might be more restricted.

Vulnerability to negative equity: If property prices drop, you may find yourself in negative equity, where your mortgage is higher than the value of your home.

The benefits of a 10% deposit

Saving a 10% deposit can take longer, but it brings its own advantages that can make it worthwhile if you’re able to wait.

Pros of a 10% deposit:

Better mortgage rates: With a 90% LTV, you typically qualify for better interest rates, resulting in more manageable monthly repayments.

More mortgage options: Lenders often view a 90% LTV as less risky, giving you access to a broader range of mortgage products.

Lower monthly payments: Over time, lower interest rates reduce your monthly payments, freeing up your budget for other expenses or even saving for future upgrades.

Cons of a 10% deposit:

Longer saving period: A larger deposit means more time spent saving, which can delay your homeownership journey.

Potential property market changes: While saving for a bigger deposit, property prices could rise, making it harder to meet the 10% threshold you’re aiming for.

Higher opportunity cost: Money tied up in savings could be used elsewhere, such as investing or paying down other debt.

Real-Life Example: 5% vs. 10% Deposit Comparison

To give you a clearer idea, let’s look at an example of a £200,000 property:

With a 5% deposit (£10,000):

• Loan amount: £190,000 (95% LTV)
• Estimated interest rate: 4.5%
• Monthly repayment: Approximately £950

With a 10% deposit (£20,000):

• Loan amount: £180,000 (90% LTV)
• Estimated interest rate: 3.8%
• Monthly repayment: Approximately £850

In this example, the 10% deposit reduces monthly payments by around £100, which could make a significant difference over time.

Which deposit option is right for you?

Choosing between a 5% and 10% deposit comes down to your personal financial circumstances, goals, and how eager you are to buy. Here are a few questions to help clarify your decision:

What is your outlook on property market trends? Property values can fluctuate. A higher deposit can buffer against negative equity, which might be important if the market seems uncertain.

How urgent is your homeownership goal? If you’re eager to buy soon and want to get on the property ladder, a 5% deposit could be your best choice.

What’s your budget for monthly payments? With a 10% deposit, you’ll likely secure lower monthly payments, which can ease budgeting. However, you’ll need to consider the delay in saving this amount.

Are you eligible for government support? Schemes like the Help to Buy Mortgage Guarantee can make a 5% deposit more viable.

Alternatives to consider

If neither option feels quite right, there are other avenues to explore:

Lifetime ISA: These savings accounts boost your deposit savings with a government bonus, helping you reach a higher deposit threshold faster.

Shared Ownership: A lower deposit is required, and you can gradually increase ownership over time.

Family boost mortgages: Some lenders offer mortgages that allow family members to assist with deposit contributions, which can help you reach 10% without additional saving time.

In closing

In the end, there’s no one-size-fits-all answer to the 5% vs. 10% deposit debate. A 5% deposit is ideal if you want to get on the property ladder sooner but can handle slightly higher monthly payments. A 10% deposit, meanwhile, provides access to better rates and greater financial security but may delay your buying timeline.

Carefully assess your financial goals, lifestyle, and future plans before making a decision. Consulting with a mortgage advisor can also provide personalised insights and help you navigate your options effectively.
By weighing up these factors, you’ll be in a strong position to choose the deposit option that best aligns with your homeownership dreams in the UK.

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