Deposit. Probably the most common word you hear during the house buying process and, perhaps the one that makes people the most apprehensive. With any property purchase, unless you are lucky enough to buy in cash, you will need some form of property finance loan such as a mortgage. And, with any kind of mortgage, you will normally need to contribute some of your own funds towards the purchase.
Many moons ago a lot of mortgage lenders allowed you to purchase a property without contributing any money yourself, known as a 100% mortgage. However, now most mortgage lenders want to limit the risk factor of lending to clients, so they all require some form of deposit. Different mortgage lenders require different cash contributions depending on their products and what they perceive as high-risk lending, so it is important that you know what your mortgage lender’s deposit requirements are to avoid disappointment later down the line.
We recommend that the best thing you can possibly do is speak to a specialised mortgage advisor like Oportfolio who knows the mortgage market inside out and the deposit criteria of every lender. In this blog we are going to discuss the different types of deposit that mortgage lenders will accept, the different types of mortgages you can get depending on your deposit and some tips on how to prepare your deposit for your new purchase.
What will a lender accept?
There are generally three ways that people get a deposit for a new property purchase and not all lenders will accept all the ways, which is where a mortgage advisor comes into the picture. An advisor will be able to give you help and guidance with the deposit you have available and will be able to direct you to the right lender for your specific circumstances. The three main ways that people get a deposit are 1) From their own savings, 2) From a family gift, 3) From a loan.
Getting a deposit from your own savings can be straight forward and complicated at the same time. Using your own savings as a deposit is simple as no money is changing hands from third parties, it’s all yours and available when needed. Most mortgage lenders and solicitors (looking after the legal side of things for you) will want to see three months bank/savings statements showing the source of your savings for money laundering purposes but generally, that is all the proof you will need. And, once your mortgage has been offered and completion dates are set, your solicitor will transfer the deposit directly from your account and everything will be in place for the purchase of the property to take place. Where the struggle can happen is with getting the savings in the first place!
What are new buyers saying?
The usual feedback from buyers is that currently, with rent prices and the cost of living going through the roof, people are struggling to save the necessary deposit required by the mortgage lender. A lot of lenders ask for a minimum of 5% of the purchase price of the property as a deposit but equally, a lot of lenders ask for 10, 15 and 20% minimum. To put these figures in to perspective, if you were buying a £350,000 apartment in London you would need to put down a minimum of £17,500 deposit but a lender could ask for a minimum of £70,000 depending on your mortgage affordability!
The larger the deposit you can contribute, the more appealing the mortgage product and rate generally. Currently, for a 95% mortgage (5%) deposit you could be looking at rates from 2.19% potentially but for a 60% mortgage (40% deposit) you could potentially be looking at rate from 0.85% so it really does make a difference with how much you can contribute yourself towards your new home.
Obviously not everyone has £17,500 lying around in savings so a lot of people are looking at ways in which they can cut back and be thrifty such as moving back in with parents, limiting their daily budget, cancelling mail orders and subscriptions, and reducing nights out so that they can eventually have enough money saved for a deposit. There are also various savings accounts and ISA’s such as the ‘Help to Buy’ ISA, available through banks and building societies that have been designed specifically to help you set up a structured savings plan filled with benefits and bonuses to encourage savings growth. With both, your mortgage advisor will be able to give you some guidance and help you come up with a plan to get your savings ready and in order.
For those of us who will still struggle to save enough money ourselves to put towards a deposit, most mortgage lenders will also accept a family gift as a deposit. Now, of course not everyone will have this option but for those that do, a family gifted deposit or gifted deposit contribution to top up your own savings can be a huge game changer when buying a new home. The only real rules that mortgage lenders have are that the gift is a non-refundable gift and not a loan and that the family member gifting the deposit is a direct family member e.g., parents, grandparents, siblings and not distantly related cousins or family friends who you consider family!
Is there a deposit limit?
There is also normally no limit to the amount of deposit gifters you have meaning that you can have several people helping you out with the deposit. If you don’t want to be completely dependant on your family’s gift and would like to put some of your own money down, that is no problem at all. There is normally no limit to how much your family can contribute on top of your own savings, as long as your deposit meets the minimum required by your specific mortgage lender.
Similarly, to using your own savings as deposit, your mortgage lender will also want to see proof of your deposit gifter’s savings to make sure that the deposit is available when needed and to make sure that it has come from a good source. Again, they will normally ask for 3 months bank/savings account statements from all parties gifting the deposit and will sometimes ask for a formal written gifted deposit letter from the gifter which states that it will be a non-refundable gift.
The third and final deposit source that some people choose is to secure a deposit through a separate personal loan. Currently there are only one or two mortgage lenders on the market who accept a loan as a deposit due to the risk factor of the entire property essentially being bought through a loan with no cash contribution from the buyer at all. Although not widely accepted as a deposit source and sometimes being a difficult route to pursue, this can be the only way forward for some buyers.
If you do decide to go down this route, it is extremely important that you speak to a mortgage advisor as there are a few things that you need to consider. Firstly, as we’ve already mentioned, most lenders will not accept a loan as a deposit and if you try to get a mortgage agreed through one of these banks, your application will not be accepted and could mean that you lose the property you wish to purchase.
Secondly and most importantly, as you have taken out an additional credit commitment in the form of a loan, the repayment of this loan must be factored into your mortgage affordability. For example, if you have no credit commitments, generally a mortgage lender will be willing to lend you around 4.5X your income however this will reduce depending on the amount of credit commitments you have. If you use a loan for a deposit, the monthly payment will affect the borrowing potential and if this is not factored in when applying for a mortgage or an agreement in principle, this could have disastrous consequences later down the line. We would recommend that you leave this to an experienced advisor to look at for you to avoid any disappointment later down the line.
Well, there we have it, three different ways of getting a deposit for your new purchase, each with different benefits. Not every way will be the best way forward for you so we can’t emphasise enough the importance of speaking to an experienced mortgage advisor who will be there with you every step of the way to give you advice and guidance and get you the deposit you need and the property you deserve. If you or anyone you know is stuck with where to start, feel free to contact us to speak to one of our expert mortgage advisors.