How Much Deposit Do I Need To Buy A House?
How much deposit you need to buy a property depends on your circumstances and what it is exactly that you are trying to do. Here we explore how much you might need given your own personal situation.
WHY DO I NEED A DEPOSIT ANYWAY?
In years gone by 100% mortgages were readily available and indeed before their demise, Northern Rock was offering 125% loan to value mortgages, that is to say, if you were buying a property valued at £100,000 they would lend you up to £125,000 (where did it all go wrong?!).
Lenders need you to put down a deposit simply to reduce their lending risk. If they lend you 100% of the purchase price then for some reason you fall into arrears and they need to take possession of the property then it only takes a small dip in house prices for them to suffer a loss (and they don’t like that).
Also, there is a school of thought that says if you haven’t invested some of yours or your family’s money into your home then you might find it a bit too easy to “walk away” should the going get tough and you were struggling to meet your monthly payments. Also, if you are not in a position to save up say, 5% of the purchase price yourself then it could be argued that you’re not quite ready to get onto the property ladder.
WON’T THE GOVERNMENT PAY THE DEPOSIT FOR ME?
No, but if you can find 5% from your own resources then you could qualify for the Government’s Help to Buy equity loan scheme. This applies to new properties only. You put in 5% and the Government loans you up to 20% to make up a 25% deposit. After 5 years you need to look at paying the equity loan back possibly by way of a remortgage or from savings you have been able to make in the meantime.
If you qualify you can also open a Help To Buy Isa where you can save towards your deposit and the Government pays you a 25% bonus once your house purchase completes.
I’VE GOT 5% DEPOSIT – IS THAT ENOUGH?
At the moment, yes 5% is enough in lots of circumstances. Not all Lenders will accept only a 5% deposit though so your options are more limited and normally you will need a reasonable credit score to qualify. There are Lenders out there that would consider you for a 95% mortgage with an average credit score but the rate of interest would be higher.
MY CREDIT HISTORY IS POOR – HOW MUCH DO I NEED TO PUT DOWN?
Many of the specialist Lenders want you to put down at least 15% deposit if you have a poor credit history, once again as above this is simply to reduce their risk in case a repossession occurs. It is much more difficult to obtain this type of mortgage than it was in the mid-2000s but it’s not impossible.
WHAT ABOUT BUY TO LET?
You’ve always needed to put down a larger deposit for Buy to Lets and most Lenders at the moment are looking for 25%.
CAN I TAKE OUT A LOAN FOR THE DEPOSIT?
This could be possible but the vast majority of Lenders won’t let you do this, essentially this would still be 100% lending.
CAN SOMEONE GIFT ME A DEPOSIT?
Yes, this happens all the time. Generally, it’s “Bank of Mum and Dad” gifting or other family members but even family friends can gift you money as long as they can evidence the funds, prove who they are and confirm they are not expecting repayment of the gift.
ARE THERE ANY CIRCUMSTANCES AT ALL WHERE I DON’T NEED A DEPOSIT?
If you are buying as a sitting tenant at a discount from the open market value, from a family member or if you qualify for a discount under the Right to Buy scheme then normally you don’t need to put any of your own money in as the equity is already “built-in” to the deal.
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