Your personal circumstances will determine how much deposit you need to purchase a property. It also depends on what you are trying to do. Here your friendly Mortgage Broker in Birmingham will explain how much you might need given your situation.
The times of 100% and 125% mortgages are now firmly in the past. Now having the Credit Crunch also in our rear view mirror, lenders are feeling more confident about offering customers the ability to take out a 95% mortgage.
It is necessary that you prove to the lender, prior to taking out your mortgage, that you can in fact keep up your monthly repayments responsibly and on time. This gives the lender the comfort of knowing they can place trust in you, and that you are not a risk to them in the future. The last thing a lender needs is for a borrower to be irresponsible with their income and fall into arrears, which in turn would mean the lender has to repossess the home.
Saving for a deposit is often viewed to be the most difficult part of the process for many First-Time Buyers in Birmingham and one of the biggest hurdles in the property market. Along with this, there are various different factors which could make it seem even more intimidating to someone without experience in this field.
There are often many questions about deposits, so here at our Mortgage Broker in Birmingham, we try and answer as many as we can for our customers in need.
Pre-2007 before the market crashed and we entered the Credit Crunch, 100% mortgages were readily available for First-Time Buyers in Birmingham. In some cases, mortgage lenders were even offering a 125% loan-to-value mortgages. What this means is, if you were buying a property valued at £100,000, they would lend you up to £125,000.
To significantly reduce their lending risk, the mortgage lender is going to need you to put down a deposit. If they lend you 100% of the purchase price and you unfortunately happen to fall into arrears, they would need to repossess the property. From there it would only take a small fluctuation in that areas house prices, and it would be a loss on their end.
Also, there is a notion in the minds of some, that if you haven’t invested some money, whether it be from your own income or a relative’s, into your home, then you might find it a bit too easy to “walk away” if you suddenly encountered any hurdles during your term. It could also be argued that if you are not in a position to save up a deposit of at least 5% of the properties purchase price, then you may not be financially ready for such a large and important commitment just yet.
If you happen to put down a larger deposit than the usual standard, then more often than not you’ll find that your lender may offer you a lower interest rate. This all comes down to risk once again, because they will lending you less, thus making you less of a risk. It is important to know that products are offered in different bands of 5%, with 95% of Mortgages being the most costly of the lot.
In some cases you might find that this is indeed a possibility, though it is not very common. Your mortgage lender will consider it as a monthly payment and therefore put it down as an additional credit commitment on your part. As this is the case, you will likely be granted a smaller mortgage, rather than the one you originally would have qualified for if you had not borrowed the deposit from a credit provider.
This is widely disliked by mortgage lenders, because although part of the payment will be going to another party, you are essentially borrowing 100% of the purchase price, plus interest on both the mortgage and the loan individually.
The majority of mortgage lenders will accept a gifted deposit, and these can come from a variety of people. Generally speaking, this is from friends and family. There are certain rules that the ‘donor’ will have to adhere to such as confirming that it is purely a gift, and not a loan that is needed to be paid back at any point in time. They must also provide ID and proof of funds to help the lenders out with anti-money laundering regulations.
We can safely say, that if it weren’t for the ‘Bank of Mum and Dad’, the property market would look completely different.
As mentioned earlier on, various specific forms of ID and documents are needed to evidence where your funds came from, as lenders like to see how your income has been built up and how you have saved up.
If it is showing in your account that you have had any large deposits moved into your bank account recently, then you will need to provide the lender with documents to evidence exactly where it came from. For example, if you have recently sold something expensive like a car or something highly valued that you’ve been holding onto, then you will need to provide the receipt and how much you sold the asset for, which should be able to match the amount shown in your bank account.
Large cash deposits usually present themselves as being quite a large problem, especially when it comes to audit trails. Unfortunately this can sometimes one of the trickiest parts of the application. The longer the funds have been in your account then, the easier life will be for both you and the lender.
If you are selling your home or a property that is in your portfolio, then the Memorandum of Sale provided by the Estate Agent will be sufficient proof.
If you qualify for the Government’s Help-to-Buy Scheme, then the minimum deposit required will still be 5%. You are able to top this up to 25% via the equity loan, which will allow you to obtain a lower rate mortgage. An important factor to bear in mind is that if this if you consider this option, then the 20% deposit provided by the Government is to be seen as a loan. Whereas a Gifted Deposit is a gift, the Government Loan will need to be paid back.
You may not always necessarily need a deposit for a property. If the house is worth £100,000, and you have been offered it at some form of discount, for example, £90,000, then some Lenders will accept this as your deposit. This works well if you have the Right-to-Buy in Birmingham from your Local Authority or other social landlords, as you may be offered a discount here too.