You’ve seen your dream home and have worked out your monthly mortgage budget – all you need now is your deposit.
And that’s where things get tricky! How much money do you actually need for your deposit? It could be the factor in deciding whether or not you get your hands on your new pad.
Why do I need a deposit?
You need a deposit as there are very few mortgage lenders who will happily loan you the entire amount you need for your purchase.
Mortgage lenders want to assess your ability to repay the debt with interest. Using your own money not only means you are showing you are taking risk, it also means borrowing less.
As a result, the amount you owe will be lower. This tends to make mortgage lenders happier… well, as long as your budget adds up and your not over-stretching your finances!
How much deposit you put down depends on your individual circumstances. If you’re buying a £200,000 house you’ll need £10,000 to pay a 5% deposit. So, you will borrow £190,000 and have 5% equity in your property. In simple terms, that means effectively own 5% of your property.
If you’ve got more cash available, you need to borrow less and you will own more equity in your house.
Of course, even 5% of a property’s value is a lot of money. But to help buyers, the Chancellor announced a new mortgage guarantee scheme for first-time buyers and home movers in his 2021 budget speech.
The scheme ensures the government offers a guarantee to banks to encourage them to offer 95% mortgages, helping people buy a home with a 5% deposit. It runs from April 2021 to December 2022 and new and existing properties priced up to £600,000 are eligible.
Consider a bigger deposit
While the 5% deposit is a great way to get onto the property ladder, there are many reasons why might consider increasing that amount. Here are just a few:
- Cheaper repayment amounts
As we have explained, the larger the deposit, the smaller the loan. And the smaller the loan, the smaller your monthly repayments. When it comes to managing monthly cashflow – where you’ll have council tax, insurance and bills – the less you have to shell out on your mortgage means having more to spend on other essentials.
- Better deals are available A larger deposit will make you more attractive to lenders and you maybe offered a mortgage at a lower interest rate. It’s estimated that 90 per cent mortgages are priced around 1% cheaper than 95% deals. So the more you put down, the better chances you have of a cheaper mortgage.
- More chance of being accepted When you apply for a mortgage, lenders will carry out checks on your application. You’ll be assessed based on your income, debts and other financial history. The cheaper the monthly payments the more likely the chances of you being accepted by the bank or lender.
- Bigger budget If you stick more money down, you’ll be able to buy a bigger and better property. The more you have to play with, the more lenders will lend, so your dream could further expand if you can stretch your initial cash-down amount.
So, you may think deposits are a bit of a nightmare, but they are essential when it comes to buying a house.
If you’d like help working out what deposit you can afford, then please don’t hesitate to get in touch.
Your home may be repossessed if you do not keep up repayments on your mortgage