Deposits

Saving a deposit for a mortgage can be the biggest hurdle to getting on the housing ladder, especially if you’re already renting.

Nevertheless, a deposit is usually required, so reduce non-essential spending and save as much as you can. Even a small amount per month can soon add up.

Why do I need a deposit to buy a house?

It’s because banks no longer tend to offer 100% mortgages. People used to be able to borrow the full amount needed to purchase a house, but during the financial crisis of 2008, property prices plummeted and people owed the banks more than their homes were worth. The banks wouldn’t get back all the money they were owed even if they repossessed and sold the properties.

In order to provide a little more security, lenders now require deposits. As a result, if house prices drop, your deposit (called ‘equity’ once it is invested in bricks and mortar) is the first to be eroded. In the event of repossession, the banks are hoping they can recoup the mortgage debt.

How much deposit do I need?

It depends on your personal situation.

Put down the largest deposit you can. You will need to borrow less, which results in smaller monthly repayments or borrowing the money for a shorter period of time.

The smallest deposit is usually 5% of the agreed purchase price. As a result of every additional 5% you put down, your interest rate could improve.

A lot depends on the lender’s risk profile. Their primary concern is whether they can recover their money if you stop paying them. The lender has a right to repossess and sell your property in order for them to recoup their money.

If you have a 5% deposit and house prices fall, you could end up owing the bank more than the house is worth. As a result, 95% mortgage interest rates are higher than those for 90% mortgages. Since the bank is already taking a risk by accepting a 5% deposit, they want to ensure your payment history is good, i.e. that you have not missed payments on other forms of credit. They check your credit file to determine this.

Missed payments, defaults, and CCJs on your credit file indicate to the bank that you might stop paying them back. As a result, you may have to pay a larger deposit and/or a higher interest rate.

For a better idea of how much deposit you will need, speak to a mortgage advisor like us.

Where can my deposit come from?

All parties involved in the purchase must comply with anti-money laundering regulations. You need a clear paper trail to evidence where the deposit has come from.

The money itself can come from a few sources. Some of the common ones are:

Savings

Putting money away every month. Six months’ bank statements are usually required to prove the build-up of funds. A wad of cash under the mattress won’t work! A lump sum paid into the account will be queried, so be prepared to provide evidence if you have sold something. It is still a gift if somebody deposits money into your account.

Consider a Lifetime ISA to boost your deposit if you’re a first time buyer.

Family gift

The good old bank of mum and dad. In most cases, lenders only accept gifts from close blood relatives, such as parents, grandparents, and siblings. There are some who will accept gifts from aunts, uncles, and cousins as well.

Many lenders are hesitant to take a gift from a non-married partner because they are concerned about the durability of the relationship. What will happen if you break up and the ex wants their money back?

Those who gift will need to sign a form stating that they will not take any legal interest in the property and that it is a genuine gift (not repayable). If the money is meant as a loan or if the person gifting is moving in with you, you will have limited options in terms of mortgage lenders.

The relative must be able to provide valid identification and evidence of where the money came from. In rare cases, lenders have requested proof of the relationship, such as birth certificates.

Investments

Such as Premium Bonds or stocks and shares. As well as bank statements, you’ll need to provide your investment record.

Inheritance

Often evidenced by a bank statement and some sort of documentation from the solicitor who dealt with probate confirming where it has come from. The deceased does not have to be a family member.

Can I borrow the deposit?

The vast majority of mortgage lenders will not accept a deposit that has come from borrowing on a credit card or loan. Those that do will factor the repayments into their affordability calculation.

Some lenders offer special products if a family member wants to help with a deposit but does not want to gift the cash. The funds are locked away in a savings account for a set period of time (usually five years). The savings accrue interest but the bank can take from this pot or keep hold of the funds for longer if you miss a payment.

What if I have no deposit?

If you don’t have a deposit because you’ve been renting, and family aren’t able to help out financially, you could consider a Track Record mortgage.

This is a 100% mortgage based on your record of paying rent and bills, so no deposit is required.