If you’re a first-time buyer, saving for your deposit will likely be one of your biggest concerns right now. As it’s such an integral aspect of the home buying process, it’s no doubt occupying most of your thoughts. Once you’ve saved up, you can finally get your foot on the property ladder.
But how much do you need and who do you pay it to? Or can you buy a house without a deposit? If you can, is it a good idea? In this guide, we’re looking at all you need to know about house deposits when you’re a first-time buyer.
WHY DO YOU NEED TO PAY A HOUSE DEPOSIT?
When you pay a house deposit, you’re purchasing a chunk of equity in your home. If you put down a deposit of 20% of the value of the property, this is the percentage of the property you own outright – in line with the value of your home when you bought it. You’ll need to get a mortgage to cover the rest.
The bigger deposit you have, the more of the property you own when you buy it. Mortgage lenders will also likely give you better rates if you have a decent deposit.
HOW MUCH DEPOSIT DO I NEED FOR A HOUSE?
On average, you’ll need between 10 and 20% of the value of the property as a deposit. The more you can put down, the lower the loan to value (LTV) ratio of your mortgage – this refers to the percentage of the money used to buy the property that’s coming from the mortgage lender vs. the percentage that’s coming from your deposit. For example, a deposit of 20% would mean an LTV of 80%, whilst a 10% deposit gives an LTV of 90%.
Generally speaking, 80% and under is considered a good LTV. Anything above 80% may be viewed as high. The more money you can put down as a deposit and the lower the LTV, the better the available mortgage deals in terms of rates and mortgage terms.
CAN I BUY A HOUSE WITHOUT A DEPOSIT?
Technically it is possible to buy a house without a deposit. In this case, a mortgage company covers the entire value of the property with the mortgage – this is called a 100% LTV mortgage. Many mortgage companies don’t offer this, however. Those that do won’t do so at favourable rates, and they will need to see proof of affordability, i.e. that you will be able to cover the monthly payments.
Lending 100% of the value of the home represents a greater risk for the lender. These kinds of mortgages are therefore expensive with high interest rates. When you enter into an agreement like this, you own no equity in the property. As you make your mortgage payments each month, you’ll gradually start to build up equity. Once you have enough, you can look to remortgage for a better deal.
Typically, 100% LTV mortgages are only offered as guarantor mortgages where a third party (often a family member) takes on the risk associated with the mortgage. It can be risky for you, your guarantor, and the mortgage company.
IS IT POSSIBLE TO GET A MORTGAGE WITH A DEPOSIT OF LESS THAN 10%?
There are government schemes aimed at helping people onto the property ladder, where they don’t have a sufficient deposit. One such option is the Mortgage Guarantee scheme, which enables you to buy a house worth up to £600,000 with just a 5% deposit.
You can buy any property valued up to this amount, whether a new build or an older home. Those lenders participating in the scheme have to offer five-year fixed mortgages as part of their range of 95% LTV mortgages. The government gives a guarantee to the lender that they will shoulder some of the cost if the lender loses money. For example, if a buyer fails to meet the monthly mortgage payments and the home is repossessed and the lender fails to make back what they originally loaned.
There are advantages and disadvantages to this kind of scheme, including:
ADVANTAGES OF A 95% MORTGAGE
It’s easier to save for a deposit for first-time buyers, as you only need to put down 5% of the property’s value.
Several lenders are offering 95% LTV mortgages in line with the government’s mortgage guarantee scheme.
Compared to a 100% LTV mortgage, you have more mortgage products to choose from, with better interest rates.
DISADVANTAGES OF A 95% MORTGAGE
You’ll pay more over the course of your mortgage, as the interest rates and mortgage fees will be higher than mortgages with lower LTV ratios. Better rates are available if your deposit goes up by as little as 5%. If you can save more you will be able to choose from better deals and better rates.
There is more chance of going into negative equity. If you have a small amount of equity in the property and the value drops, you may owe more than the property is worth.
You may be subject to a higher lending charge (HLC). This is where lenders charge a fee on mortgages where the LTV is very high (usually over 80-90%). The size of the fee will depend on the lender. It can be a percentage of an amount over a certain LTV or 1.5% of the mortgage.
CAN YOU USE A LOAN FOR A HOUSE DEPOSIT?
If you don’t have anything for a deposit, it is possible to use a personal loan. It’s a risky option as you’ll effectively be taking out a 100% mortgage and will owe two separate lenders. This means you’re adding debt on top of debt which isn’t advisable.
Also, it will be very difficult to find a mortgage lender that will be willing to lend to you. When mortgage lenders evaluate a mortgage application they look at a range of affordability checks to make sure you’ll be able to cover your mortgage. They will be aware of the existing debt used for the house deposit.
If a mortgage lender is willing to lend to you in these circumstances, it’s unlikely that you’ll get a favourable rate and will end up paying more in the long term.
DO YOU NEED TO PAY A HOUSE DEPOSIT WHEN YOU BUY A NEW BUILD?
Just like with an existing property, when you buy a new build you’ll need to put down a deposit and secure the rest of the funds from a mortgage lender. The more money you can put down as a deposit, the more equity you’ll own in the property and the better the mortgage rates available.
HOW TO PAY A HOUSE DEPOSIT
As part of the conveyancing process when you buy a house, you’ll appoint a solicitor to act on your behalf. It is your solicitor who deals with the deposit.
You simply pay it to your solicitor once you exchange contracts, and they will pay it to the solicitor representing the vendor. It’s not something you pay direct to the seller. When you buy a new build, the deposit is paid to the developer’s solicitor.
At Wain Homes, we’re on hand to help you through every stage of the home buying process. Get in touch with us today todiscover our brand-new homes located across the UK.
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