How to get your deposit together
Posted on 4th October 2023 at 13:13
The biggest hurdle for most 1st time buyers is getting that initial deposit together. Just the word deposit can bring with it so many questions, like how much do I need? Where can the funds come from? What’s the best way to save? This blog is here to help you with all those questions! This blog is going to act as your one stop shop for everything you need to know about the deposit you need for buying your first home and everything that comes with it.
So, let’s jump straight in!
Why do you need a deposit?
99.99% of mortgage cases require you to have a deposit when it comes to buying your next home. The few occasions you don’t need a deposit are if you are using a 100% mortgage like the one Skipton Building Society offers, you are buying your home from the council using the right to buy scheme (where the council give you a discount for being a long serving tenant) or you are buying the property from a relative or landlord who sells the property to you at a discount (where the discount acts as your deposit).
How much do you need?
In most cases where you do need a deposit the minimum deposit you can use is 5%, this is 5% of the purchase price. So, the money you have available may cap your purchasing power or you may choose to work backwards from the home you would like and 5% of that becomes your goal deposit. 5% is the minimum lenders will accept and not all lenders offer mortgage options for people with a 5% deposit so the options are limited and as a result the interest rate and fees associated with these products can be higher.
If you can get to 10% however you will open yourself up to the wider market as all lenders offer products to customers who have a minimum 10% deposit. With this you will also secure a lower interest rate and that interest will be charged on a smaller mortgage which will significantly reduce the overall cost of your mortgage.
The reason you need a deposit is because the lenders want to see you hold some ‘skin in the game’, they want you to be accountable for the property and the upkeep of it as well as the upkeep of the property. If you had nothing invested into the property you do not have as much riding on whether you keep the property or not. The act of being able to save a deposit is also a reassuring sign to lenders that you can effectively manage your finances. Being able to save a deposit isn’t a guaranteed that you will be able to manage a mortgage, but it is a good indicator that you can afford to budget for a mortgage payment. Why would they lend you £100,000 if you can’t evidence you can handle £1,000?
What impact does your deposit have?
Not only does your deposit open your options in terms of lenders but the larger your deposit – the better interest rate you will secure. The mortgage products you qualify for are based on Loan to Value (or LTV) this is the size of the mortgage compared to the value of the property. The smaller the loan to value (LTV) or the larger deposit/ smaller the mortgage the cheaper the interest rate on these products.
These are to rewards those who have paid down their mortgage and those who are willing to invest more of their own money into the property and rely less on the lender. These deals ore less risky to lenders are you have more equity in the property and aren’t over leveraged should interest rates rise or you come into financially difficulty.
Stretching your deposit as far as reasonably and comfortably possible will help you to secure better deals and ultimately save money on your mortgage. You will have a lower interest rate on a smaller mortgage saving you £1,000s.
Now you know how much you need and why its important, but where can you get your deposit from?
Lenders will allow your deposit to come from several places, the funds need to be evidence that they can come from a legal source and that they are yours or you have been given authority to use them from another party. Below are the main sources of deposit lenders will accept…
Your own savings
This is as simple as it sounds and the route most buyers go down. Your own savings will be money you have saved (obviously) you would evidence this by providing a bank statement or savings statement that shows all the funds needed on the date your application goes in. This must show your name and address on to show it belongs to you. If there have been some large transactions in and out the lender may ask for proof of where the money came form or went to for anti-money laundering purposes.
A close relative such as parent, grand parent, Aunty/uncle or sibling can gift you money. A gift is classed as a sum of money that they give you that they do not want back, you won’t be paying it back, you won’t pay interest on it and the person giving you the money has no interest in your property when you become the legal owner. This is straight forward because in the eyes of the lender, why wouldn’t a family member want to help their child or relative get on the property ladder?
Stocks and Shares/ Premium bonds
As long as you can evidence that the stocks and shares can be liquidated quickly and that today's value of those shares is enough to cover your deposit amount this is fine. The same applies here for proof, if you have a statement with your name and address on and the value of the investment that’s fine.
If a close one has passed and left you money in the will, a letter from the solicitor can be accepted as proof of deposit. This is providing the estate isn't in probate as this can delay the money making its way to you.
If you are moving home, you do not need to find a deposit again as the equity in your home acts as your deposit. The initial deposit you put into the property and any equity built up through paying down your mortgage and your property increasing in value over time can be passed over on completion from your current property to your new property. You can simply calculate your equity by:
Taking your house value (or sale price)
Deduct your outstanding mortgage.
Deduct any moving fees such as mortgage charges, solicitor fees & estate agent fees
= The money left over is Your equity
If you are buying a property from a relative or your landlord, they can sell it to you at a discount and the discount acts as your deposit. For example, if a relative/ landlord offers you a £150,000 property but will accept £135,000. That £15,000 equity will act as a 10% deposit for you, and we would find you the remaining 90% of the purchase price as a mortgage. This is the same for the right to buy scheme where you buy your house from the council and the discount the council give you acts as your deposit.
Supercharge your savings with the power of the Lifetime ISA (LISA)
When the government stopped the help to buy ISA back in November 2019, they quickly replaced the savings scheme with the Lifetime ISA which is aimed at UK residents saving for their 1st home or for their retirement. The scheme works like this:
• You can save up to £4,000 per year tax free.
• Receive a 25% bonus on all money saved in the ISA that year, £4,000 becomes £5,000.
• You must have the ISA open for at least 12 months to qualify for the bonus.
• If the money is withdrawn for any reason other than your 1st home or retirement you surrender the 25% bonus.
• Upon buying your first home your solicitor will claim the deposit on your behalf on completion which you can use towards your deposit or post completion you can use towards furniture & decorating etc
Most standard savings accounts will return 4.7% as of today (October 2023) which is nowhere near the 25% you will get with a LISA. If you are fortunate enough to be able to save more than £4,000 per year, your your LISA first to ensure you your the return there and any extra money you save put into a standard your.
As always if you would like more information or have any questions about deposits please don’t hesitate to call us on 01482 205084 or email email@example.com.
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