Save £8,160 on your mortgage costs

When it comes to mortgages, it really is worth saving up for the biggest deposit you can afford. John Fitzsimons looks at just how much a small deposit will cost you in the long run.

The size of the deposit at your disposal when applying for a mortgage has rarely been so important. Two years ago, even if you had little or no money available as a downpayment on a house, you still had a wide range of options, and would not have had to pay much more than those with massive deposits.

All that has changed. There is now a significant difference in the rate you can access depending on just how much cash you can hand over upfront, and it's getting worse by the week.

I've put together some tables which show just how hard you will be hit if you only have a relatively small deposit.

The long-term fixers

Let's start with what in my view is the most sensible type of mortgage deal if you are about to buy your first home: five-year fixed rate mortgages. Below I have put together the market-leading deals in each loan-to-value (LTV) bracket, based on a 25-year repayment mortgage of £150,000.

Lender	Loan-to-value (LTV)	Rate	Fee	Monthly repayments	Amount paid each year
Post Office	60%	4.45%	£599	£829	£9,948
HSBC	70%	4.84%	£0	£862	£10,344
Clydesdale Bank	80%	4.99%	£999	£876	£10,512
Royal Bank of Scotland	90%	5.99%	£0	£965	£11,580

Now that's pretty shocking isn't it? My table shows that if you only have a 10% deposit (90% LTV) to put down, you will pay around £1,600 a year extra in mortgage payments, compared to a borrower with a 40% equity stake (60% LTV). Over the course of a five year deal, that means you'd pay an extra £8,160!

Even the jump between a 60% LTV mortgage and a 70% LTV mortgage is a difference of almost £400 each year, hardly an insignificant sum. And remember, these are the market-leading products. Should you go for a different product, the contrast is even starker.

A quick fix

So how do things change on a three-year fixed mortgage, again on a 25-year repayment mortgage of £150,000?

Lender	Loan-to-value (LTV)	Rate	Fee	Monthly repayments	Amount paid each year
Leeds BS	60%	4.25%	£199	£812	£9,744
First Direct	70%	4.29%	£599 (plus booking fee of £399)	£815	£9,780
Furness BS	80%	4.45%	£199 (with a completion fee of £800)	£829	£9,948
Britannia BS	90%	5.79%	£599	£947	£11,364

The good news is that there is precious little difference between the rates on offer if you have a 20% deposit compared to those with 40% equity burning a hole in their pocket.

However, if you are unable to convert your 10% deposit into a 20% deposit, then you will end up paying an extra £1,416 a year. That's an extra £4,248 over the course of the three-year deal.

Once again, while things are pretty close with the very cheapest products on offer, when you move beyond the market-leading rates, wider gaps do begin to emerge - so be sure to shop around.

Gambling on a tracker

And finally, I had a look at the variable mortgage products on offer at the moment. Personally I think you have to be crazy to even consider a tracker mortgage at the moment, because I think interest rates will only go up in the near future, not down. But for the sake of balance, here are the best deals on a three-year variable deal.

Lender	Loan-to-value (LTV)	Rate	Fee	Monthly repayments	Amount paid each year
Co-operative Bank	60%	2.99% (BBR + 2.49%)	£0	£710	£8,520
Co-operative Bank	70%	2.39% (BBR + 1.89%)	£995	£664	£7,968
Furness BS	80%	3.49% (BBR + 2.99%)	£499	£750	£9,000

There are no products available at 90% loan-to-value on a tracker basis, though certain small building societies (such as Cumberland BS) are offering deals at 85% loan-to-value to local borrowers.

While there is an obvious anomaly with the 70% LTV deal from the Co-op, which is the market leader by a fair distance, it again shows that those with a 40% deposit face much smaller payments than those with just 20%.

It's all about choice

Of course, it's not just about the cheapest products, but also how many different mortgages you can choose from in each loan-to-value band.

The table below, which comes from mortgage sourcing firm TrigoldCrystal, outlines just how scarce high loan-to-value deals are - and how the situation is getting worse.

Loan-to-value (LTV)	Number of products week ending 10/06/2009*	Number of products week ending 17/06/2009*	Number of products week ending 24/06/2009*
90%+	224	180	178
85%	664	591	620
80%	1149	1135	1166
75%	3490	3399	3126
70%	4242	4085	3710
65%	4686	4525	4156
60%	5920	5687	5308

*Totals combine purchase and remortgage mortgages

While the number of products available in each loan-to-value band has decreased over the past fortnight, there is still a stark difference between the choice on offer for those with a large deposit, and those with just a small cash sum - 5,308 mortgage deals compared to just 178.

It's the deposit, stupid!

One thing to bear in mind are house price movements.

House prices appear to be, if not at the bottom, then pretty close. Bear in mind that as house prices rise, the size of the deposit you'll need for, say, a 60% LTV deal will only increase. You will have to make up your own mind as to whether that is motivation enough for you to put down your deposit and go for that more expensive mortgage now, or whether you would be better off sitting tight and saving up a bit longer for a larger deposit.

What is clear is that not only do those with a large deposit currently have the benefit of a cheaper mortgage deal in the long run - they also get the widest choice in who they wish to borrow from. If you only have a small deposit, your options are infinitely more restricted. So don't delay - start saving up today...

More: Goodbye, cheap fixed rate mortgages | Fix your mortgage rate before it's too late!