Mortgage deposits and income multiples explained

illustration of Mortgage deposits and income multiples explained

Mortgage deposits

To get a mortgage, you need a cash deposit upfront. A mortgage deposit is a sum of money you pay to your mortgage lender before you move in. The larger the amount of money you can put down as your deposit, the more of the property you’ll own straight away, and the smaller your mortgage needs to be. For example, if the property you want to buy is worth £200,000, and you have £10,000 to use as a deposit, your mortgage would then be £10,000 less than £200,000 – £19,000. 

The difference between the property value and deposit amount is known as the ‘loan-to-value’ ratio. If you have a 10% deposit, your loan-to-value ratio is usually expressed as a 90% mortgage, or a 90% loan-to-value.  

You usually need a deposit amount of at least 10% of the property’s value you’re looking to buy. 

Unless, you’re a first-time buyer who is eligible for the Help To Buy Equity Loan scheme backed by the UK Government. If you’re eligible for the scheme, you only need a 5% deposit. 

Why is 10% the minimum amount of mortgage deposit I need?

Because of the huge financial impact the Coronavirus pandemic has had, mortgage lenders aren’t offering mortgages with less than a 10% deposit at the moment. For example, if you want to buy a property worth £200,00, the minimum amount of deposit you’ll need is 10% of £200,000 which is £20,000. 

The global pandemic has made everything very uncertain – many people have lost their income and because of this we’re in what’s called a recession. 

Whenever the country experiences a recession, mortgage lenders have to protect themselves in whatever way they can from offering loans to people who may not be able to pay them back. That’s why mortgage lenders aren’t offering 5% deposits at the moment. They’re trying to reduce the risk of lending to people by asking for larger deposits up front. 

When the economy is healthy, lenders can be more flexible and offer mortgages with 5% deposits. So once our global and national economy recovers, it’s likely smaller deposit mortgages will become available again. But sadly at the moment, no mortgage lenders are offering mortgage products with 5% deposits. 

We update our content constantly because things change quickly at the moment. So you’ll always find the most up-to-date info on our site. 

How to get a larger mortgage deposit

There’s a few options to consider if you don’t have the minimum 10% mortgage deposit amount. 

It’s best to chat through your options with a professional mortgage advisor because they’ll be able to look at your unique situation and give you tailored advice, but here’s a few ideas: 

  1. Save
    You could consider saving up more money before applying for a mortgage if you don’t have a 10% deposit. 

  2. Ask for a gift 
    If it’s an option for you, you could consider asking your parents, close family or close friends for a gift of money to put down as a deposit. 

  3. Look at lower value properties or areas 
    If you have an amount of money to use as a deposit, but it’s not quite enough for 10% of the property you want, you could consider looking for a lower value property. Or, you can search for a property in a cheaper area – if that’s an option for you. 

How does bad credit affect my loan-to-value ratio?

Having credit issues can affect your mortgage application in a few different ways, but it doesn’t make getting a mortgage impossible. 

To find out how credit issues affect your loan-to-value ratio, read our Guide: How does having bad credit affect loan-to-value? 

Income multiples 

Your income multiple is literally just a multiple of your income. For example, if you earn £30,000 a year, your 3x income multiple would be £90,000 and your 4x income multiple would be £120,000. 

It’s a figure mortgage lenders use to determine the size of the mortgage they’re willing to offer you. 

Many lenders have lending criteria that determines how much they’re willing to give out. For example, if a mortgage lender had a rule that they only lend people up to 4x their annual salary, then they wouldn’t be willing to lend you more money than that on your mortgage. 

Currently, there aren’t any mortgage lenders who are giving mortgages to people to the value of more than 4.5x their annual salaries. 

This means you won’t be able to get a mortgage higher than whatever your annual income is multiplied by 4.5. For example, if you’re annual income is £30,000, the maximum you’d be able to borrow on a mortgage is £135,000. 

What if I’m applying for a joint mortgage?

If you’re applying for a joint mortgage with someone else, you can add your incomes together to increase the amount you can borrow. So if you earn £30,000 annually, and your partner earns £25,000 per year, your combined total income will be £55,000. 

Your income multiples will then be multiples of £55,000.

Why are income multiples capped at 4.5x?

During 2020, a lot of mortgage lenders capped their income multiples because of the financial uncertainty brought on by the global Coronavirus pandemic. 

Lenders do this to protect themselves, but also borrowers. They always try to avoid a situation where a borrower might not be able to keep up with their mortgage payments. 

Very high income multiple mortgages are harder to keep up with because they’re higher value. Because the pandemic brought on such huge financial instability, lenders want to make sure they lend responsibly. 

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