Before you’re able to get a mortgage on your first home, you’ll need to save for a house deposit. The amount of money you’re able to put down upfront will have a direct effect on how much a lender will allow you to borrow, and therefore which houses you can afford to buy.
With house prices rising and the cost of living constantly going up, saving enough to buy your first home can sometimes feel impossible, but it is doable. You just have to manage your expectations, set a realistic goal, and possibly make some changes to your spending habits. Plus, there are schemes that have been designed to support you in saving for your first home.
To help you with the process of getting a mortgage deposit together, we’re going to talk you through everything you’ll need to know. Here’s what we’ll cover:
When buying a house, you’ll typically need a deposit of at least 5% of the house’s value. For example, if you’re buying a house worth £150,000, you’ll need a deposit of £7,500.
However, with a larger deposit, you’ll have access to better deals on your mortgage, which could save you thousands. This is because, the more money you have to put towards a house, the less risk you pose to a lender.
If you’re able to save a 15% deposit, you’ll be able to find some great deals. And, if you manage to put down a 25% deposit on a property, you’ll have access to the lowest possible rates of interest, which will make your mortgage cheaper overall. So, if you’re in a position to do so, it can be well worth saving for longer in order to put down a larger deposit when buying a home.
Most lenders will require you to have a deposit of at least 5% of a property’s value before they will offer you a mortgage. There is a very small chance that a lender will offer you a 100% mortgage, which means you don’t need a deposit, but this is incredibly rare and very risky for both borrowers and lenders.
In short, it is possible to get mortgage without a deposit. However, this will require you to take out a 100% mortgage, which are rare and carry a high level of risk.
The biggest reason 100% mortgages are so risky is that house prices could fall, leaving you in negative equity. This means you’ll owe the mortgage lender more money than the property you’ve bought is worth. This can make it incredibly difficult for you to move or remortgage.
Additionally, the interest levels of 100% mortgages are incredibly high, and the repayments tend to be very expensive. It’s much better to take out a mortgage with a deposit of at least 5% if possible — even if it means you’ll have to wait longer to get on the property ladder.
The average first-time buyer deposit was £32,899 in the first half of 2017, which is equivalent to 16% of the purchase price, according to Halifax [PDF].
Because very few people can afford to buy a property outright, the majority of us will have to take out a mortgage to cover the cost. And, the loan to value ratio allows lenders to weigh up the value of a property and the mortgage you would require to buy it. So, for example, if you’re looking to buy a house worth £250,000 and have saved a deposit of £50,000, you’ll have to take out a mortgage of £200,000 to afford it.
If you take out a £200,000 mortgage to buy a house that’s worth £250,000, this will work out as an 80% loan to value ratio with your deposit covering the remaining 20%. Loan to value ratios of 80% and under are typically considered to be low, while those over 90% are usually considered to be high.
As you might expect, with a high loan to value ratio, lenders may feel that offering you a loan could be a risk. This is why you will often find that the interest rates are higher on a mortgage if you have a deposit that’s less than 20% of the value of a property you’re hoping to buy.
Lenders will typically frown upon you taking out a personal loan in order to cover your house deposit, which means this could prevent you from getting a mortgage. So, we would strongly advise you not to go down this route. When you apply for a mortgage, lenders will ask where the money for your deposit came from, and usually stipulate that this needs to have come from a non-repayable source, such as your savings.
It’s likely to significantly affect a lender’s decision about whether they want to offer you a mortgage if they find out that you’ve taken out a loan to pay your deposit because, in this situation, you will have effectively taken out a 100% mortgage and some of that borrowing will be unsecured.
With house prices — and, therefore, mortgage deposits — at an all-time high, saving to buy your first home can seem almost impossible. Plus, you also have to think about all of the extra costs you’ll need to cover, such as legal fees and moving costs. But, there are some steps you can take to save more money in the shortest time possible, and we’re going to look at those here.
It might seem obvious but, the less money you spend, the more you can save. So, when you decide to start putting money away for a house deposit, you should begin by identifying where you could slash your outgoings. For example, could you move back in with your parents for a while to save on rent and bills? Alternatively, if you live on your own or with a partner and don’t want that to change, consider moving into a cheaper property, or even a house share.
You should also think about how much transport is currently costing you and see if there are any cheaper alternatives you could take advantage of. If you have a car that’s costing you a lot to run and you rarely travel long distances, consider whether getting rid of it and opting to use public transport instead could save you some cash. And, if you already spend a lot on public transport, look for cheaper alternatives — would it be possible for you to cycle or walk to work? Could you car-share with a colleague?
It’s also well worth looking at your day-to-day spending and cutting costs where possible. Could you reduce how many nights you eat out at restaurants, put yourself on an online shopping ban, or spend less on your weekly food shop? Every little really does help.
The UK government is becoming increasingly aware of how difficult it is to get onto the property ladder, which is why they’ve brought in a range of schemes to give first-time buyers a helping hand.
The Help to Buy ISA and Lifetime ISA have both been designed to help you get the most out of the money you save for your deposit. An equity loan from the government can also help to bump up your deposit so you have access to cheaper deals when taking out a mortgage. Here, we’ll talk you through all of the government support that’s available to you as a first-time buyer.
When you first open a Help to Buy ISA, you can deposit a lump sum of anything up to £1,200, and then save up to £200 a month after that.
When you buy a house, the government will boost your savings by 25% on completion. However, the maximum government bonus you can receive is £3,000, which means you won’t receive any additional bonus on savings above £12,000. The minimum government bonus you can receive is £400, which means you’ll need to save at least £1,600 before you can benefit from the scheme.
Help to Buy ISAs are available to every first-time buyer, and you aren’t restricted to one per household. This means that, if you and your partner have a Help to Buy ISA each, you can both take advantage of the bonus when buying a house together.
When you have a Help to Buy ISA and are in the process of buying a house, you’ll need to instruct your solicitor or conveyancer to apply for your government bonus. This will then be added to the amount you’re putting towards your first home.
Lifetime ISAs are often used to save for retirement, but we’ll be looking at how they can also be used by first-time buyers who are saving to put a deposit down on a residential property.
You must be between the ages of 18 and 40 to open a Lifetime ISA and can save up to £4,000 a year until you’re 50. The government will provide you with a bonus of 25% when you buy a house using the money.
There are also some conditions you need to consider when you’re planning to buy your first home using a Lifetime ISA. These include:
As with the Help to Buy ISA, if you’re buying a property with another person who also has a Lifetime ISA, you can both take advantage of your government bonuses.
With a Help to Buy Equity Loan, the government will lend you up to 20% of the cost of a new-build home, so you will only need a 5% deposit of your own, and a 75% mortgage to cover the rest of the cost.
This can help you to gather the funds you need to buy a house much quicker than you would otherwise be able to. For example, if you’re looking to buy a house that’s valued at £200,000, you’ll only need a 5% deposit of £10,000 to access mortgage deals with the best possible rates, as the government will lend you the £40,000 you need to make up a 25% deposit.
Of course, this involves taking out two loans almost simultaneously, and you will have to pay the government loan back. But, you won’t incur any fees for the first five years and you can pay it off at any time, which can make this an attractive option for first-time buyers who are struggling to get a substantial deposit together.
Here at The Mortgage Genie, we’re able to offer specialist Help to Buy mortgage advice, and walk you through the process from start to finish.
The short answer is yes, you can receive financial help from parents and close family members when you’re trying to get a house deposit together. However, it isn’t as simple as them transferring the funds into your bank account, so you can declare the money yours: there is a process that needs to be followed.
When someone contributes to your housing deposit or covers it altogether, this is called a gifted deposit. And the crucial thing is that it must be a gift, with no agreement for you to pay the money back. If your parents or close family members are looking for a way to help you get on the property ladder, this is usually the simplest way.
Some lenders will only allow you to accept a gifted deposit from certain people. Immediate family members such as your parents, siblings, and grandparents will usually be accepted, but more distant relatives like aunties and uncles sometimes aren’t.
Additionally, while lenders typically have their own rules and requirements when it comes to mortgages, there are some common clauses and exclusions you should be aware of before you start the process of buying a house with a gifted deposit. For example, the company you choose to take your mortgage out with may require the person who’s gifting you some or all of your deposit to make a written declaration that they don’t expect you to pay it back. If you do have to pay it back, they might categorise this as they would a traditional loan which, as we mentioned earlier, could deter them from giving you a mortgage. Alternatively, they might add the deposit repayments to your monthly outgoings to determine whether they think you’ll still be able to make your mortgage repayments.
Your benefactor may also be asked if they expect to have equity in your property, or whether they expect to live there after purchase. They may also be asked to sign a declaration that states they relinquish all legal interest in the property.
Additionally, conveyancers will conduct their own checks to determine where a gifted deposit has come from. As a result, they’ll typically require the full name and ID of any benefactor, as well as evidence of the origins of the money. If it’s coming from a savings account, they’ll usually require a bank statement and may also ask for details about how the money has been accumulated.
Saving for a house deposit can feel overwhelming, and sometimes even impossible. There’s so much information out there about the process that it can be difficult to work out exactly how much you need to save, and some of the schemes designed to help you aren’t always the easiest to understand. But, it’s definitely doable, and we hope the information in this guide will help you on your way.
If you’re looking to make a purchase soon, you might be interested to know that we offer dedicated mortgage advice for first-time buyers. If you would like us to help you find the best deal for you, call us on 033 33 44 33 72 now.
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