Being a first-time buyer is hard. There’s jargon, there are new concepts, and there’s the expectation to raise thousands of pounds towards the cost of the property.
But thankfully, help is at hand.
This guide answers thirteen questions about mortgage deposits that we hear asked a lot.
After reading you’ll have a firmer understanding of what you’re up against and how to successfully overcome the hurdles. You’ll be well on your way to your new home.
What is a deposit?
It’s a percentage of the property price paid in a lump sum.
The balance is made up with a mortgage, money you have saved and, potentially, assistance from the government via special schemes. (These are covered later in this guide).
How do deposits work?
The questions in this section explain where deposits fall in the house-buying process.
When do I pay the deposit?
Usually the deposit is paid when contracts are exchanged.
When does the seller get the deposit?
The deposit is transferred to the seller’s solicitor once both parties have signed the contract. The seller’s solicitor then transfers it to the seller.
Who holds the deposit in the meantime?
A conveyancer (solicitor) will hold the deposit in a special account where it gains interest until the sale. Legally, estate agents are not allowed to hold the deposit.
What is a ‘deposit to the seller’?
This is a refundable payment of £500-1000 made by the buyer to the seller or estate agent to demonstrate their intent to buy.
Is it possible to lose a deposit?
Yes, but it is very unlikely. If you pull out after all contracts have been signed and the deposit has already been transferred, you probably won’t get it back.
How much deposit do I need when buying a house?
The lowest viable deposit in the vast majority of cases is 5% of the property value.
Many buyers look to save more than this for their deposit, as it gives them a more favourable Loan to Value (LTV) ratio. A better LTV means you have to borrow less, leading to lower interest repayments for the duration of the mortgage.
As an indicator, a 2017 review of first-time buyer deposits put the UK average at £33,000. In London this figure is £106,577; here in Northern Ireland, we have the lowest average at £16,457.
What are the pros and cons of putting down a bigger deposit?
A bigger deposit reduces the amount you have to borrow, which equates to lower repayments and a lower total amount repayable.
You have more choice of mortgage deals at 10% and above, with the best deals being available at 25% and above.
Obviously a higher deposit means more money must be sourced before the move, so it may not be a suitable option for everyone.
Is a deposit the only expense when moving?
No, there are other fees and expenses to consider while moving, as well as ongoing payments after the move.
Where does the money for a deposit come from?
The deposit will be a combination of money you are able to save, and assistance you are able to secure. The latter comes in the form of government schemes, gifts from family, or even gifts from particularly generous friends. If you’re opting for joint ownership, you can pool your money with other tenants.
The 2015-16 English Housing Survey found that 29% of first-time buyers get help with their deposit from family and friends.
How to save up for a mortgage deposit
If you’ve not had to save such a large amount of money before, securing a mortgage can be a daunting prospect. It’s important to remember that many people manage it, and that help is available.
This section gives advice on where to look for money that you can put toward your deposit.
Step 1: Any windfalls?
"The Bank of Mum and Dad" is more popular than ever. Whether money is given or lent, it can make a huge difference.
If your parents can't afford to give you cash, they can pass on their 'property wealth' by downsizing or releasing some of their equity.
Inheritance is often put toward a mortgage: if this is an option, consider saving it to boost your deposit funds.
Many buyers won’t have these options, but fear not: there are plenty of other ways to save.
Step 2: Do you have existing savings?
Put them toward your deposit, if so. Unless they're set aside for something very specific, the money is probably most effectively spent in reducing the eventual amount you have to borrow for your mortgage.
This could be savings in a savings account you’ve been squirrelling money away in, premium bonds you were given as a kid, or even the jar of coins under your bed.
When it comes to saving for a deposit, incorporate money from as many sources as possible.
Step 3: Save effectively
Regular, monthly savings are better than occasional lump sums. Firstly, they're easier to plan around. Secondly, you can update your lifestyle accordingly if you have the same amount of outgoings each month.
It's hard to get good interest rates on savings nowadays, but these will help:
- In the short term, a regular savings account is recommended. You will get better interest if you ‘lock in’ your cash, meaning there will be withdrawal restrictions.
- In the medium term, you could use an ISA for tax free savings (watch for capped deposits), fixed rate bonds, or a regular savings account.
Money Saving Expert have a great guide to saving.
Step 4: Make a budget and stick to it!
Knowing the amount you need to save in order to get the deposit you want is a helpful motivator. If you need £15,000 and want to buy a house in 2 years, that's £625 a month that needs to be saved.
Knowing your income and outgoings, and figuring out the maximum amount you can spend to hit your savings goal, will help.
Step 5: Look for places to cut costs
Jot down all your outgoings. Be ruthless: include all necessities and all luxuries. Then look for places to save.
Can you get a cheaper phone contract? Dropping from £40 to £20 means less data, but frees up £240 per year.
Can you cycle to work? If you spend £5 a day on public transport and work 215 days a year (about the average number of work days, minus holiday and a couple of sick days), you could save ~£1075 a year.
Switch off lights and heating when you're not using them. This means small but noticeable savings on your bills.
Can you move back in with your parents, or with someone else? If you're lucky enough to have this option you can really speed up the process by saving all/some of your rent costs.
If that's not an option, can you downsize? Rent will be lower in smaller room or less affluent neighbourhood; perhaps smaller digs than you're used to will be worth the savings boost.
Mortgages are expensive and it’s not as easy to make your money work hard while you save. But ultimately, it’s up to you to be diligent when saving for a mortgage. Follow these tips and you will do it.
What help is available when saving for a deposit?
Here are nine schemes to help first-time buyers in 2019. These are applicable to many demographics, so you’ll find something to suit your needs!
Note: technically not all of these help with your deposit, but we’ve included them here because they align with the goal of reducing what you have to spend on buying a property.
1. Stamp Duty Exemption
If you’ve not owned or part-owned a property before, stamp duty is waived on the first £300,000 of the property value. The maximum eligible property value is £500,000.
The maximum saving is £5,000: stamp duty on a £300,000 property = £0; stamp duty on a £500,000 property with the exemption applied = £10,000, or £15,000 without.
Percentages can be a bit confusing, so we’ve put together a few examples of how stamp duty works:
- First-time buyer, house value £250,000
- Stamp duty = £0
- 0% of home value in £0 - £300,000 bracket, which includes the whole value
- Non first-time buyer, house value £250,000
- Stamp duty = £2500
- 0% of home value in £0 - £125,000 bracket
- 2% of the £125,000 value in the £125,001 - £250,000 bracket = £2500
- Non first-time buyer, house value £2m
- Stamp duty = £153,750
- 0% of home value in £0 - £125,000 bracket
- 2% of the £125,000 value in the £125,001 - £250,000 bracket = £2500
- 5% of the £675,000 value in the £250,001 - £925,000 bracket = £33,750
- 10% of the £575,000 value in the £925,001 - £1,500,000 bracket = £57,500
- 12% of the £500,000 value in the £1,500,000 + bracket = £60,000
2. Help to Buy (H-t-B)
Available only to first-time buyers. Aimed at those only able to secure a 5% deposit.
The government offers an interest free loan up to 20% of the property value, fee free for the first 5 years (1.75% thereafter, with an annual increase of Retail Price Index + 1%). Fees are additional to mortgage repayments.
The property must be a new-build with maximum value £600,000.
- In London the maximum loan is 40%
- In Wales the maximum property value is £300,000
- In the Affordable New Build (or Smaller Development) Scheme - Scotland’s equivalent - the maximum loan is 15% of a £200,000 value
- There is no H-t-B scheme in Northern Ireland
3. H-t-B ISA
The government gives you £50 for every £200 saved, up to £3,000 (£12,000 savings). This amount is paid to the mortgage lender on completion (it cannot be used toward deposit).
This can be used in conjunction with H-t-B
4. Starter Homes Scheme
Homes in this scheme are available to 23-40 year olds who don’t (and have never) owned a home.
Over 200,000 homes will be available with at least a 20% discount. The maximum value for properties covered by the scheme is £250,000, or £450,000 in London.
You cannot to sell or rent at market value for at least 5 years
5. Shared Ownership
You buy 25-75% of a property from a housing association, and pay rent on the rest (based on market valuation prices).
This is a more manageable step toward purchase aimed at first-time buyers (but not exclusively limited to), and covers new-builds and resale properties.
Households with combined salaries below £80,000 (£90,000 in London) are eligible.
6. HOLD (Home Ownership for People with Long-term Disabilities)
This works in the same way as shared ownership, with the exception that if those properties do not meet your accessibility needs, you may be able to buy a house on the open market.
7. Right to Buy (R-t-B)
Council tenants who have had a public sector landlord for 3 years (not necessarily consecutive) can apply to buy their home at a reduced rate.
The maximum discount is £78,600 (£104900 in London), and the amount will be based on your circumstances. The thresholds change each tax year too: keep an eye on the Gov.UK information page.
8. Right to Acquire
This scheme is the same as R-t-B, but aimed at housing association tenants rather than council tenants. There are some stipulations, outlined at the Gov.UK website.
9. Preserved R-t-B
If you were a council tenant living in your home when it was transferred from council ownership to a housing association or another landlord, you may be eligible for Preserved R-t-B. This works in much the same way as R-t-B, but is tailored to a slightly different audience
Buying a house can be a daunting prospect, but there are plenty of ways to make the process smoother.
Knowing what you’re up against is the biggest help. Hopefully this guide has helped with that!
Being organised and disciplined is a massive factor, too. The most detailed savings plan means nothing if you don’t stick to it.
Staying motivated can be tricky. If you’re struggling to keep saving, or wondering whether it’s all worth it, imagine yourself in a brand new home that you’ve saved up for yourself. It may seem far away, but it is possible, and it will feel AMAZING once you’re in.
If you have any other questions about deposits, or any other aspect of buying your home, get in touch with our team of experts. We’ll be happy to help.