The Deposit Dilemma
Taking your first steps onto the property ladder is an exciting prospect but it can come with its challenges.
How on earth do you save up £1000s for a deposit? More and more people are turning to the bank of ‘mum and dad’ but this just isn’t an option for everyone. If you’re shelling out for rent and trying to save for a house it’s a tough gig.
Problem is, your deposit amount can make a huge difference to the cost of a mortgage, how much you can borrow and which lenders will be willing to lend to you.
So it’s important to understand how much you need, how to save this amount and what help is out there.
The bigger the deposit the better
The more money you can put in the better. Here’s why…
- Access to better mortgage rates — the higher the deposit amount you put in the lower risk you become in the lenders eyes, so they are more keen to offer more competitive mortgages.
- Reduce your monthly payments — a larger deposit will reduce the size of your mortgage and therefore reduce your monthly payments over the term.
- Increased chances of qualifying — reducing your monthly payments means you are more likely to pass the affordability checks all lenders take out.
- The larger your deposit, the more of your home you will own outright. This reduces your risk of falling into ‘negative equity’ — owing more on a mortgage than the property is worth.
A 40% deposit for example is likely to grant access to the cheapest mortgage rates on the market. To achieve this on a £125,000 home for example you would need a deposit of £50,0000 — a stretch for most first time buyers.
Some lenders will offer a mortgage with a 5% deposit, so £6,250 for a £125,000 home. Whilst a deposit of this size is more accessible to most, borrowers will have limited options and are likely to pay high interest rates.
The average deposit for a first time buyer is 17%, which given the above scenario is still a lofty £21,250.
How much deposit do you need?
To calculate how much deposit you need, there are two major factors to consider:
- Typical property prices in the area you want to purchase a home.
- How much you can afford in monthly payments
Once you understand the likely cost of your ideal first home. Begin gathering mortgage quotes at 95% of the property’s value. If the repayments are too high for you then you will need a larger deposit, in which case you will need to look at borrowing 90% or lower. You can see your options here (link to mortgage journey)
Save, Save, Save
If like most first time buyers the notion of saving £5,000 — £10,000 seems an impossible task, fear not, help is available:
- Help to buy ISA — an ISA with a 25% bonus for first time buyers using the savings as a deposit.
- Help to buy equity loan — Borrow up to 20% of the value of your home, put in 5% of your own savings and take out a mortgage for the remaining 75%.
- Help to buy shared ownership — Purchase between 25% — 75% of your home and pay rent on the remaining share.
- Purchase a home with a friend or partner.
Buying a house: extra costs
The Deposit is the largest financial obstacle for most first time buyers however there are also other costs to consider:
- Legal fees: you’ll need to appoint a solicitor to arrange the purchase of your property. Costs vary between firms, and can range from a few hundred pounds to more than £1,000.
- Stamp duty: applicable to any property with a value over £125,000.
- Land registry fees: ranging from £40 to over £910, depending on the property value.
- Property survey: ranging from £0 to over £1,000.
- Mortgage arrangement fees: Some lenders will charge anything up to £2,000 to arrange your mortgage.
To make things easier for first time buyers Mojo takes into account all associated costs of a mortgage and offers a recommended option. Help and advice from a mortgage expert is available, we will make all fees clear and best of all our service is free of charge.
