Are you looking to buy your first home? Or are you considering upgrading to a larger property? It can be particularly daunting thinking about the process of getting onto the property ladder, and many people have questions when it comes to mortgages - particularly around deposits. Rest assured that you do not necessarily need thousands of pounds saved up in order to make it happen: there are in fact zero deposit options available for those who wish to become homeowners. In this article, we will explain what house deposit requirements typically look like and offer advice as to how you can decide whether buying is right for you.
What is a mortgage deposit and why is it required?
When purchasing a property, it is highly probable that you will require a mortgage. To obtain a mortgage, a deposit is typically necessary. Lenders will not only evaluate your creditworthiness but also ask for a deposit which serves as a form of security for your loan.
How much mortgage deposit do I need?
Ensuring you have the minimum deposit required is essential. However, the more you can put down, the more lenders you will have to choose from and the better interest rate you can secure.
Although one or two lenders have come forward with mortgages where less than 5% deposit is an option, in most cases a minimum deposit equal to 5% of the property price is needed. For example, if you are looking to buy a £200,000 property, you will need to put down £10,000, which is 5% of the property's value. In this scenario, you would require a mortgage of £190,000, therefore with a Loan to Value (LTV) of 95%.
If you are fortunate enough to have a 40% deposit (£80,000), you would only need a mortgage of £120,000, resulting in a 60% LTV. With a larger deposit, you will have more options when it comes to lenders and it is likely that you will secure better mortgage terms, such as a lower interest rate.
It is also worth keeping in mind that different lenders have different requirements, and some may offer more favourable rates based on your financial circumstances. For example, if you have a good credit score and a stable income, some lenders may accept a smaller deposit than if you have a lower credit score or irregular income.
Lastly, it is important to factor in other costs associated with buying a home, such as stamp duty, legal fees, and survey costs. These costs can add up quickly, so it is important to have a clear understanding of your budget before you start house hunting.
Can family help with my deposit?
Yes, most lenders are willing to accept financial assistance from family members for your deposit, and in some cases, from friends as well. However, there are important considerations that they should keep in mind before agreeing to assist you, such as:
1) They need to decide whether they will be providing the money as a non-repayable gift, with no expectation of any co-ownership or interest in your property.
2) They may also want to consider securing their investment by putting a legal charge on your property.
3) Rather than use some of their savings would they prefer to put up their own property as security for your deposit? In this instance no deposit exchanges hands, the lender simply takes a charge over their home until such time you can repay them.
Whichever route you choose, it is crucial that you communicate these details to your mortgage broker (or directly to your bank) right from the beginning. Failure to do so could potentially lead to complications or delays further down the line.
Can I get a mortgage without a deposit?
While most lenders require a deposit, it can be challenging to save up. However, there is currently one lender who recognises this and is offering a no deposit option. If you are renting and have a solid history of paying your rent and bills on time for 12 months, this lender will consider lending you the full value of the property. This "No Deposit Mortgage" (more commonly known as a 100% Mortgage) is subject to affordability and credit score checks, just like any other scheme.
In addition, there are other ways to avoid the need for a deposit:
1) Purchase a property from a family member or your current landlord at a discounted price. Lenders will accept the discounted amount as your deposit, known as a ‘Concessionary Purchase Mortgage’. For example, if the property has a market value of £250,000 and they agree to sell it to you for £225,000, the £25,000 difference can be considered your deposit.
2) As we have touched on before, family members can use their own property as security for your deposit. In this case, the lender may take a charge on your family member's property and therefore not require a deposit from you.
What is the best way to save for a Deposit?
Saving for your first home may feel like an overwhelming challenge, but with the right approach, it is certainly attainable. The government launched the Lifetime ISA (LISA) back in 2017 - an excellent way for achieving your dream of owning your first home. Anyone aged 18 and above can open a LISA and contribute up to £4,000 per year. The government adds a 25% bonus to your savings at the end of each tax year, meaning your money grows faster. For example, imagine saving £250 per month. In just one year, you will have saved a total of £3,000, which will earn you a bonus of £750. It is important to note that there are limitations on withdrawals if you plan to use the funds for anything other than purchasing your first home before turning 60.
If you can buy with someone else, your journey to homeownership may be even shorter as you can combine your savings to boost your deposit. And remember, as little as 5% of the purchase price is enough to qualify for a traditional mortgage. Take control of your future and start saving for your first home with the help of the LISA. It is a smart and reliable way to make your homeownership dreams a reality.
Lastly, maximise your savings whilst you are in a good position to do so, some basic tips to help you:
Seize the Opportunity: While enjoying life at home during your younger years, you can also rapidly grow your savings. Imagine how much easier it would have been for those of us who grew up in the 70's and 80's if we had listened to our parents and saved half of our monthly wages. Start by setting up a standing order on payday to put aside a fixed amount in a dedicated savings account. Remember, if you do not have it, you will not spend it!
Gain Confidence in Mortgages: Consult a mortgage broker to determine your potential monthly mortgage payments. Then, aim to save that exact amount every month. By doing so, you will not only see your savings grow rapidly but also enjoy peace of mind, knowing you can comfortably afford your mortgage going forward.
Polish up Your Spending: Cut back on unnecessary expenses whenever possible. Instead of regular nights out in town, consider hosting get togethers in the comfort of your own surroundings. Instead of purchasing clothes for that special occasion maybe you should consider renting them? Statistics show that we typically wear these items only three times before they end up forgotten at the back of our wardrobes!
Say No to Debt: Minimise additional debts whenever you can. Not only could this impact your ability to afford a mortgage, but it could also hinder your progress in saving for your deposit.
My deposit is not a problem, how can I borrow more?
Consider a Joint Borrower Sole Proprietor (JBSP) mortgage if you have saved up for a deposit but now find that you cannot borrow enough to buy the right property. This option involves finding someone to join you on the mortgage to boost your income.
More lenders now offer JBSP mortgages, which have the added benefit of not affecting your first-time buyer stamp duty incentive or exposing the other party to future capital gains tax since they will not be named as owners on the property title deeds.
When considering these mortgages, it is important to borrow at a level that you can manage in the future, ideally within 5 years. Some lenders will want to know your plans for eventually taking on the mortgage in your own name and assess the feasibility of this option.
When do I pay my deposit?
During your purchasing journey, you will collaborate with a solicitor (conveyancer) who will, amongst many processes, also oversee the Exchange of Contracts. This crucial step entails paying your mortgage deposit and legally committing to the purchase of the property. Typically, this process takes place a week or two before your scheduled move, known as Completion.
It is imperative that you exercise caution and only transfer funds once you are certain that your solicitor has requested them.
To sum up, a mortgage deposit is a form of security for your lender as they take on the responsibility of lending you money to buy a house. Depending on your financial situation and existing commitments, family members may be able to help with your deposit which is a wonderful way to shorten the time it takes to save your own funds. Building up your deposit can also be achieved by cutting back on basic spending and making some additional sacrifices.
Lastly, knowing when it is necessary to make your deposit payment will avoid any surprises at the tail end of the process. All-in-all, this process may seem daunting but it need not be difficult if good advice is sought from a mortgage broker – and we are here to provide you with that expertise. We can discuss current schemes that make buying a house easier or offer advice on budgeting for future goals like owning property.
Are you ready to take your first step towards home ownership?
Have you saved a deposit and ready to buy?
Contact us today so we can help map out the steps necessary for your new home purchase!
Your home may be repossessed if you do not keep up repayments on your mortgage.
Published by Beechwood Mortgages Ref: 219335 with review and approval from Stonebridge Mortgage Solutions Limited who is authorised and regulated by the Financial Conduct Authority Ref: 454811.
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