The Deposit Decision: Understanding the Real Costs
One of the biggest decisions in home buying is how much deposit to save. Save 20% and you're golden, lenders love you, rates are competitive, no mortgage insurance. Save 5% and you'll face higher costs, fewer lender choices, and mandatory insurance. But what's the actual difference in pounds and pence?
The Deposit Size Breakdown
Let's use a £300,000 property as our example:
| Deposit % | Deposit Amount | Mortgage Amount | LTV Ratio |
|---|---|---|---|
| 5% | £15,000 | £285,000 | 95% |
| 10% | £30,000 | £270,000 | 90% |
| 15% | £45,000 | £255,000 | 85% |
| 20% | £60,000 | £240,000 | 80% |
Cost 1: Mortgage Insurance (LMI)
If your deposit is below 20%, lenders require mortgage insurance. This protects them (not you) if you default.
Mortgage insurance costs 1 to 5% of the loan amount, depending on your LTV.
| LTV | Insurance Premium (% of loan) | Cost on £285k mortgage |
|---|---|---|
| 95% (5% deposit) | 3 to 4.5% | £8,550 to £12,825 |
| 90% (10% deposit) | 1.5 to 2.5% | £4,050 to £6,750 |
| 85% (15% deposit) | 0.5 to 1.5% | £1,275 to £3,825 |
| 80% (20% deposit) | 0% | £0 |
That's a big difference. A 5% deposit on a £300,000 property could cost you £8,500 to £12,800 in mortgage insurance alone.
You cannot avoid mortgage insurance with a small deposit. It's a lender requirement. You must pay it. The only way to avoid it is to increase your deposit.
Cost 2: Interest Rate Premium
Beyond mortgage insurance, lenders charge higher interest rates for smaller deposits.
This reflects higher risk. A borrower with a 5% deposit is more likely to default than one with 20%. So lenders charge more.
In April 2026, the rate premium typically looks like:
- 80% LTV (20% deposit): 4.5% available
- 85% LTV (15% deposit): 4.7% available
- 90% LTV (10% deposit): 4.9% available
- 95% LTV (5% deposit): 5.2% available
That 0.7% difference between 5% and 20% deposit doesn't sound huge, but it compounds significantly over 36 years.
The Real Cost: A Complete Example
Let's compare the true cost of buying a £300,000 property with different deposits:
| Metric | 5% Deposit | 10% Deposit | 20% Deposit |
|---|---|---|---|
| Deposit | £15,000 | £30,000 | £60,000 |
| Mortgage | £285,000 | £270,000 | £240,000 |
| Interest rate | 5.2% | 4.9% | 4.5% |
| Monthly payment | £1,640 | £1,530 | £1,281 |
| Mortgage insurance | £10,700 | £5,400 | £0 |
| Total interest (25 years) | £206,000 | £189,000 | £145,000 |
| Total cost (deposit + mortgage + insurance + interest) | £511,700 | £494,400 | £445,000 |
| Difference vs 20% deposit | +£66,700 | +£49,400 | , |
That's the real cost. A 5% deposit instead of 20% costs you an extra £66,700 in interest and insurance over the life of the mortgage. That's more than four times your initial deposit.
Is a Smaller Deposit Worth It?
This depends entirely on your situation.
A Smaller Deposit Makes Sense If:
- You're ready to buy now and property prices are rising, waiting to save more could mean higher future prices
- You have stable employment and confident income growth, you can reduce costs later through overpayments or remortgaging
- Renting is expensive, your rent might exceed your mortgage payment anyway
- Your financial circumstances are improving, you could increase your deposit through remortgaging in 5 years
Saving for a Larger Deposit Makes Sense If:
- Property prices are stable or falling, waiting saves you money
- You can save significantly more in a reasonable timeframe, even 5% more deposit saves thousands
- You want to avoid mortgage insurance costs entirely, the difference between 10% and 20% is large
- You want lower monthly payments for peace of mind, a smaller mortgage payment is easier to manage if circumstances change
If you're choosing between a 5% deposit now and saving to 20%, the answer is usually: aim for at least 10%. The jump from 5% to 10% saves you significant insurance costs. The jump from 10% to 20% saves more, but the savings are less dramatic.
Overpayments: Reducing Insurance Later
One strategy some borrowers use: take a 10% deposit mortgage now, then make overpayments to quickly build equity. Once you've paid down enough of the mortgage, you can remortgage at a higher LTV with lower rates and no insurance.
For example:
- Start with 90% LTV (10% deposit) at 4.9%
- Make £500/month overpayments for 36 years
- Build up additional equity
- After 36 years, remortgage at 85% LTV (15% equity) at a lower rate with lower/no insurance
This works if you have the cashflow to make overpayments without stretching yourself.
Lender Availability by Deposit Size
Another hidden cost of small deposits: fewer lender options.
- 20%+ deposit: Available with almost all lenders; best rates
- 15% deposit: Good lender choice; competitive rates
- 10% deposit: Reasonable choice; rates higher
- 5% deposit: Limited lender choice; rates much higher; some lenders refuse 95% LTV entirely
With a 5% deposit, you might find yourself forced to accept a worse offer simply because you have no alternatives.
First-Time Buyer Help: Government Support
Some schemes help first-time buyers with smaller deposits:
- Lifetime ISA: Government 25% bonus on savings up to £4,000/year, up to £1,000 bonus per year
- Help to Buy schemes: Regional schemes offering shared ownership (you own a percentage, a housing association owns the rest)
- Shared Ownership: Buy a share of a property and pay rent on the remainder
For details on these, see our First-Time Buyer Schemes Guide.
Find Your Right Deposit Size
Our calculators can show you exactly what you'll pay with different deposits. See the real numbers for your situation.
Use Calculators →Key Takeaways
- Every 5% of deposit you save reduces your borrowing and costs significantly
- Mortgage insurance below 20% deposit adds 1 to 5% to your loan cost
- Interest rate premiums for smaller deposits add up over 36 years
- A 5% deposit could cost you £65,000+ extra compared to 20% over 36 years
- Even reaching 10% deposit saves substantial money vs 5%
- Consider overpayments and remortgaging strategy if starting with a small deposit
- Fewer lender options and less choice with very small deposits
Important: This article is for general information and educational purposes only. It does not constitute financial advice. Mortgage insurance costs, interest rates, and lender criteria vary. The examples in this article are illustrative only and based on April 2026 market conditions. Your actual costs will depend on your specific circumstances, credit profile, and market conditions. Before making decisions about deposit sizes or mortgages, speak to a qualified financial adviser. For personalised mortgage guidance, contact DS Financial (Appointed Representatives of Stonebridge Mortgage Solutions Ltd, FCA Firm Ref: 835094, info@dsfinancial.co.uk or 0330 22 333 10).