One of the most commonly asked questions when looking to buy for the first time is. How much deposit do I need?
The longer answer is that it is dependant on your circumstances. Purchase price, income and property type. The short answer is – about 5%.
The 5% deposit
As a rule, the majority of high street lenders have an offering for a 5% deposit. The maximum property value they will go to on this ranges from as low as £250,000 up to £600,000 and most lenders prefer First Time Buyers in this area than Home Movers.
In a few exceptional circumstances, Private Banks have been known to offer just a 5% for clients buying up to £3m. The typical profile of this will be a young professional/entrepreneur. One who has built up a very high income in a short space of time but simply hasn’t had time to build up the cash deposit needed for a large purchase. Other situations can be entertained on their merits. Such as divorce, second home etc, but always backed up by very high income or assets.
There are even a few lenders that offer ‘100% Mortgages’. Meaning no deposit is required. However they are not the true 100% mortgages we saw pre-crash.
In all instances, the lenders will require either:
- Parental Guarantor.
- Offering either income or security to back up the loan.
- Cross Charge on another property.
- No cash is put into the purchase. A charge of up to 25% of the property you are buying is placed on another family property to protect the lender in the event of repossession. The caveat is that the family property must have at least that level of equity in the property for the lender to agree to it.
- Cash on Deposit.
- Barclays Springboard mortgage is a good example of this. Where cash to the value of 10% of the property being purchased is placed with the lender as security. This is locked in for 5 years, but then can be moved after this period. Interest is also paid on the cash during this period. The benefit of this is that you don’t have multiple people on the mortgage or charges on other property. So it is quite a clean why to achieve a 100% loan with less risk to the parents.
Help To Buy and Shared Ownership
On the lower end of the deposit scale, you also have schemes such as Help To Buy and Shared Ownership.
They both work with a similar concept. You buy a smaller proportion of the property with a 5% deposit. You either have an equity loan or rent the remainder, respective to the schemes above. The intricacies of this are quite detailed and will be looked at separately. So while not perfect, it is far better than renting or living with your parents!
In a simple example, if you ‘bought’ a £400,000 property but only purchase a 60% share of the property, you would only need a deposit of £12,000 (£400,000 x 60% = £240,000. So only 5% is required of £240,000 = £12,000). The idea being you will purchase the rest of the property at a later date, or sell and use the equity toward a more standard purchase next time out.
Outside of that, there is nothing specific to first time buyers.
Lenders purely take a risk based approach, meaning from a starting point of a 5% deposit, every additional 5% deposit you put down increases the amount of lenders you can choose from and therefore decrease the cost of the loan as you are lower risk.
Lenders consider you a low risk buyer when you put down a 25% deposit or more. The 25% deposit has always been the magic number with mortgages, as house prices have never gone down by more than 25% in any one cycle. Meaning you pose the least risk of the lender getting caught short if it all goes wrong! The last key figure is a 40% deposit. Once you have a 40% deposit + you get the very cheapest pricing available and very often the exceptionally low rates you see on best buy tables.
We view our role as helping you from this start point, all the way down the risk brackets and ultimately until you are debt free. As if this process is managed correctly, you will save tens of thousands of pounds of interest in the process!