Ten per cent of a 350,000 purchase is 35,000, leaving a 315,000 mortgage at 90 per cent loan-to-value. That deposit is rarely the whole cash requirement: transfer tax or stamp duty, legal fees, a survey, mortgage arrangement fees and moving costs commonly add two to five per cent of the price on top — between 7,000 and 17,500 on this purchase.
Underestimating that second figure is the most common way a purchase stalls after an offer is accepted, because the deposit was saved and the costs around it were not.
What does the deposit size actually buy?
A lower rate, and above 20 per cent, the removal of mortgage insurance. Below that threshold most lenders either add insurance or price the rate higher, and the step at 20 per cent is usually the largest one.
| Deposit | Loan-to-value | Typical effect |
|---|---|---|
| 5% | 95% | Highest rates; insurance where it applies |
| 10% | 90% | Better rates; insurance still common |
| 15% | 85% | A further step down in rate |
| 20% | 80% | Insurance generally falls away |
| 25%+ | 75% | Best commonly available rates |
Those tiers are why saving another 2 per cent of the price can be worth considerably more than 2 per cent. Crossing a threshold moves the whole rate rather than a proportional slice of it, and a rate difference compounds over the life of the loan.
What is the break-even against renting?
Usually five to ten years, and it depends heavily on an assumption nobody can know. Buying beats renting once the equity built and the price growth outweigh the interest, running costs and transaction fees — and the transaction fees are paid twice, at both ends.
Price growth dominates the answer. At 3 per cent a year the numbers usually favour buying past about seven years; at 0 per cent they often do not, even after a decade. That is worth running both ways before treating a break-even year as a fact.
The costs that renters do not carry are the other half. Maintenance, buildings insurance, service charges and the replacement of things that wear out are real, recurring and easy to leave out of a comparison — and a rough allowance of 1 per cent of the property value a year is a common working figure.
Why is the interest so front-loaded?
Because interest is charged on the outstanding balance, and at the start the balance is the whole loan. On a 250,000 loan at 6.5 per cent over 30 years, the first payment is 1,354 of interest and 226 of principal; by the final year that ratio has almost completely reversed.
That front-loading is why the early years of ownership build so little equity, and why the break-even calculation is so sensitive to how long you stay. Selling in year three means most of what you paid went to interest and fees rather than into the house.
It is also why overpaying early is worth so much more than overpaying late — the amortisation note works through what the first twelve rows show.
What is loan-to-value actually measuring?
The lender’s exposure if the property has to be sold. At 90 per cent loan-to-value a 10 per cent fall in price wipes out the equity entirely, which is why the pricing tiers are so much steeper at the top of the range.
It also moves after completion, in both directions. Paying down the balance and rising prices both lower it, which is what makes remortgaging into a better tier a genuine option a few years in — and a falling market is what strands people in the tier they started at.
What should the affordability test include?
The whole monthly cost rather than the mortgage payment, and a rate that is not today’s. Lenders stress-test at a rate above the one on offer for exactly this reason, and running your own version at two or three points higher is a reasonable private check.
The escrow article covers what the lender adds to the payment for tax and insurance, which on a typical purchase is 20 per cent on top of principal and interest.
Questions people ask
Do the extra costs vary by country? Enormously. Transfer taxes range from nothing to double digits as a percentage of the price, and they are the single largest variable in the two-to-five-per-cent figure above.
Should I put down more or keep a cash buffer? A buffer first. Reaching the completion date with no reserve is how a manageable purchase becomes an expensive one at the first boiler failure.
Does a bigger deposit always get a better rate? Within tiers, no — the improvement happens at the thresholds. Going from 12 to 14 per cent may change nothing, while going from 19 to 20 changes the whole product.
How long do I need to stay? Long enough to clear the transaction costs at both ends plus the interest-heavy early years, which is where the five-to-ten-year range comes from.
Is renting throwing money away? No more than mortgage interest is. The comparison that matters is total cost of occupation against total cost of ownership, with the equity built on one side and the flexibility on the other.
Budget for the costs around the deposit, then test the break-even at more than one growth assumption. The down payment calculator works the deposit and loan-to-value, the rent vs buy calculator runs the comparison over a holding period, and the mortgage calculator covers the payment once you are past both.