Deposits
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Saving for a house deposit can be the biggest hurdle to getting on the property 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?
Banks don’t usually give out mortgages to cover the full cost anymore.
Back in 2008, during the financial crisis, house prices fell a lot. People owed more money to the banks than their homes were worth. When they couldn’t afford the repayments anymore, the banks repossessed the houses, but had to sell them for less than they were owed, so they lost out. Now, banks want you to put some money down upfront to make sure they won’t lose out again if you stop paying them back, and they need to repossess and sell your home.
This upfront money you put down is called a deposit. If house prices fall, the deposit you put in (which becomes your ‘equity’ in the home) is the first thing that gets affected. If the bank has to take back your home, they hope they can still recover what you owe them.
How much deposit do I need to buy a house?
It really depends on your situation.
Try to save as much as you can. The more you can put down, the less you’ll need to borrow. That means lower monthly payments or paying off your mortgage faster.
The more you put down relative to the purchase price of the house, the better your interest rate might be. The bigger the deposit, the less risk to the bank.
What’s the smallest deposit needed to buy a house?
Good credit history
If your credit history is good – i.e. you have a demonstrable record of borrowing money and paying it back in full and on time – then usually the smallest deposit you need is 5% of the price you’re buying at.
That said, there are schemes available that can accept less, such as £5k Deposit and Track Record.
Bear in mind that you still need to pass an affordability check for the required mortgage amount!
Adverse credit history
If you’ve missed payments in the past, or have any defaults or County Court Judgments on your credit file, you might need a bigger deposit or you could be charged a higher interest rate. That’s because you’re deemed a higher risk than someone who hasn’t missed payments before.
For a better idea of how much deposit you’ll need, talk to a mortgage advisor like us. We’re here to help!
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How to save for a house deposit
We’ve all seen the online articles and Facebook posts about how easy it is to save if you cut back on takeaway coffees and avocado toast! And we know it isn’t that straightforward. However, budgeting does play a big part.
Sacrifice!
If you’re really, truly motivated to save, having the end goal of buying your first house in mind, then cutting back on some areas of your usual spending is typically the best way to start.
We’re not saying you need to stop enjoying yourself entirely, but if you buy a meal deal for your lunch every day, could you start making a packed lunch instead? Skip a takeaway and cook a fakeaway? Have a cosy night in instead of a big night out?
If you sit down and go through your bank statements line by line, you might be surprised at just how much you spend on ‘stuff’!
Round up
We know it’s really hard to save, but little and often can be easier than putting big chunks away. Some banks offer round-up savings – this is a feature that automatically ’rounds up’ your debit card purchases to the nearest pound, and puts the spare change into your savings account.
Standing orders
If it’s out of sight, it’s out of mind. If you consistently get paid on the same date each month, set up a standing order to automatically transfer some of your wage into a separate savings account. Just avoid the temptation to transfer it back later on!
You could lock the money away in an account that needs 30 or 90 days notice for withdrawals to help you avoid those spontaneous purchases.
Side hustle
Make some extra money!
Do you have anything you could sell for a bit more cash? For example, some childhood toys do really well on eBay. Remarkably, people even buy and sell ‘rubbish’, like empty toilet rolls and bottle tops, online! It probably won’t make you a millionaire, admittedly, but anything you do make can go straight into a house fund.
If you have a talent, monetise it. Artistic? Look at Etsy or Redbubble. Gamer? Stream on YouTube or Twitch. Amateur photographer? Sell your pics! (We don’t mean on OnlyFans…) Good general knowledge? Apply for a TV quiz show – our advisor Emily has been there, done that!
Just make sure you can prove where you’ve got the money from, and always abide by UK tax laws.
Unsure if you can get a mortgage?
Contact us now for a no-obligation chat.
Where can my house deposit come from?
Everyone 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
Usually, you need to show six months’ worth of bank statements to prove how you’ve been saving. Keeping cash hidden at home won’t count! If you suddenly put a lot of money into your account, your lender or solicitor might ask where it came from. So, if you sold something, be ready to show proof.
If someone else puts money into your account, it’s considered a gift.
If you’re buying your first home, think about getting a Lifetime ISA. It can help you save more for your deposit. Bear in mind the account needs to be open for at least twelve months before you can take money out, so if you’re looking to buy soon, it probably won’t be right for you.
Family gift
Sometimes, if you’re lucky, your family might help out with the money. Most lenders only accept gifts from close family members like parents, grandparents, and siblings. Some might also accept gifts from other family members like aunts, uncles, or cousins.
They might not accept a gift from your unmarried partner, as things can get messy legally if you break up.
The person giving you the gift needs to sign a form. It says they’re not taking a legal interest in the property or going to ask for the money back; it’s a real gift, not a loan. If they’re moving in with you or giving it as a loan, it will limit your options in terms of lenders.
Your family member needs to show their ID and prove where the money came from. In rare cases, lenders might even ask for proof of your relationship, like 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 the estate, 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.
Can I get a mortgage with no deposit?
Potentially, yes, though having a deposit should give you more options.
Read our guide to getting a mortgage with no deposit for more information.
How can The Mortgage Store Chorley help with deposits?
We can’t save up for you, but we can give guidance on what deposit you’re likely to need and let you know if where it’s coming from is going to be acceptable.
Contact us today to start your home-buying journey.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
