The amount of deposit you will be required to have in order to purchase a property is something that will be entirely dependant on your personal and financial circumstances, as well as looking at what you are trying to do. In this article we will take a look at how much deposit you may need.
The previous era of 100% and 125% mortgages are long gone, as is the infamous credit crunch. The Coronavirus did see certain deals pulled back, but nowadays we are seeing more and more lenders feeling confident about offering 95% mortgages to homebuyers.
Based on the history of mortgages and what went wrong, having to prove to a mortgage lender that you are a responsible borrower and have the means to maintain your monthly payments. Lenders need to have a confidence that they have invested correctly. This factors in with your deposit, as it also show that you have something to lose too.
The initial saving for a deposit can often be the difficult part for many, especially first-time buyers in Nottingham who have only been renting up until this point.
It can also be seen as one of the biggest obstacles in the property market and there are certain factors involved which could make the whole process seem even more daunting to someone who hasn’t experienced it before.
As an open & honest mortgage broker in Nottingham, we are always hearing questions from customers regarding deposit. In fact, we can safely say that it’s one of the most commonly discussed topics from first-time buyers. As such, we have compiled a list of the usual suspects and the answers to these.
In years gone by, 100% mortgages were on hand to most customers. There were even a selection of companies who were offering 125% loan to value mortgages. In hindsight, this sounds crazy, as it means if you were buying a property valued at £100,000, the mortgage lender would be willing to lend you up to £125,000.
Lenders require their customers to put down a deposit to reduce their risk of lending such a large amount of money. If they lend you 100% of the purchase price and for one reason or another you happen to fall into arrears, the lender would need to repossess the property in question and attempt to sell it.
If property prices dip even by a small amount, they have now not only made any profit, but have in fact lost money on this venture.
Also, there tends to be a school of thought that if you haven’t invested some money into a property, whether it be from your own savings or a gifted deposit, you might lack attachment and find it easy to “walk away” if you happened to struggle with your monthly repayments.
There is also the argument that if you are not in a position to save up at the very least, a minimum of 5% of the purchase price of a house for a deposit, then you likely aren’t ready for such a commitment at this current moment in time.
Putting down more deposit is generally a great thing to do!
If you are putting down a higher amount than the average home buyer, the lender may actually be willing to offer you a deal with lower interest rates than usual, as you will be borrowing less and therefore less of a risk.
For example; if you are looking to buy a £100,000 home and have only saved 5% deposit, you’re only able to access 95% mortgages and would be borrowing £95,000. However, if you were able to save a 20% deposit on that same property, you would be open to 80% deals and therefore only borrowing £80,000, which a lender would much prefer if an option.
It is important to know that products are offered in bands of 5% with 95% of Mortgages being the most expensive.
In some cases, very specific ones, using a personal loan for a deposit may be acceptable, though this depends on the lender.
It’s not widely accepted, because a mortgage lender will consider it as a monthly mortgage payment and therefore treat it is technically is, as an additional credit commitment. Because of this, you would be granted a smaller mortgage as opposed to the types of mortgage deals available to those who outright saved for the deposits themselves.
The reason why mortgage lenders don’t like to get involved with these circumstances, is because you are essentially borrowing 100% of the purchase price, which if we go back to mortgage history, is what caused problems in the first place.
The majority of mortgage lenders will accept gifted deposits as a source of your deposit towards a property.
Gifted deposits can pretty much come from anyone, though it is generally family and depending on criteria, friends too. There are certain obligations that the ‘donor’ will have to comply with, such as being willing to confirm it is a gift and not something you’re required to pay back.
They must also provide ID and proof of funds to keep in line with the lenders’ to anti-money laundering regulations.
As it pertains to modern society, if it weren’t for ever-rising popularity of gifted deposits, known by many as the ‘Bank Of Mum and Dad’, we believe that the property market landscape would look completely different to how we’ve come to know it.
Much like when using a gifted deposit, using your own savings to fund a deposit will require certain forms of ID and various documents in order to evidence how these funds came to be over time.
Lenders like to see how you have been saving over time. If it looks to the lender like you have had any large deposits moved into your bank account recently, then you will need to provide documentary evidence to show where it came from.
For example, if you have recently sold a car then you will need to provide the receipt and the amount you sold the asset for. The number present on this receipt should match that of the amount in your account.
Large cash deposits can sometimes prove to be problematic, especially when it comes to audit trails. When it comes to your application, audit trails can often be one of the hardest parts. The longer the funds have been in your account then the easier everything should be.
If you are selling a property, then the Memorandum of Sale provided by the Estate Agent will be sufficient proof.
If you happen to qualify for the government’s Help to Buy Scheme, then the minimum deposit required will still be 5%. The government will then loan you an amount of around 20%, which will be put towards your deposit, totalling 25% overall.
You must always remember though, that unlike when dealing with a gifted deposit, the government Help to Buy Equity Loan Scheme is just that, a loan. Eventually, that 20% needs to be paid back.
Not always. If it is a genuine discounted purchase, let’s say that the house is worth £100,000 and you have been offered it for £90,000, then some mortgage lenders will accept this discount as your deposit. This also can apply if you have access to the Right to Buy Scheme when purchasing from the local authority, such as council or housing association.