Saving Money for a Mortgage Deposit
A big barrier to entry with getting your first mortgage is the deposit. Many people struggle to save the amount required to secure a mortgage and, in some cases, it can take several years to accumulate enough to put down on a house.
The great news is that in most situations it is a case of saving smart rather than grafting to scrimp together every penny available. In this guide we look at deposit requirements for mortgages and how to get your deposit saved in no time at all.
Let’s jump in and get to grips with saving money for a mortgage deposit.
How Much Money Should You Save?
All mortgage lenders will require some type of security against the loan they give on a property. In most cases this security is a deposit which is a sum of money put down toward the property value. In rarer cases, lenders may allow you to link existing investments or savings accounts to a mortgage product.
The typical mortgage deposit in the UK is 10%. If you are buying a property valued at £300,000 you will be asked to pay £30,000 up front if you take a mortgage with a 10% deposit.
In some cases, you can obtain a mortgage with a smaller deposit, such as 5%. In the above scenario of a £300,000 property, this would require a deposit amount of £15,000.
Buy to Let mortgages operate differently as they represent more risk to lenders. This is the risk of rental voids. Because of the higher risk the deposit required is often much higher and it is common for lenders to request a minimum 25% deposit.
What is a Big Deposit?
With a residential mortgage, ideally you should aim to put down as much as possible for your deposit. The greater the deposit the lower the amount you borrow.
A big deposit on a residential mortgage is often considered as 25% or more of the property value.
Putting down this amount of money will increase your chances of obtaining a mortgage product as you have greatly reduced the risk of the mortgage to the lender.
What Do We Mean by Mortgage Risk?
Lenders know that mortgages carry an inherent risk. Most mortgages are substantial long term financial commitments and lenders know our lives change over time – sometimes quite drastically.
In the event you fail to keep up with your mortgage payments, a lender knows they may need to repossess the property to recover the funds. When a repossession occurs, lenders want to recover the money as soon as possible and most repossessed properties go to auctions.
Properties sold at auction typically complete in 30 days, but the values that sellers obtain is often for lower than market value. Your deposit acts as a buffer between the expected value at auction and the loan amount.
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Benefits of a Larger Deposit
When putting down a larger deposit, the buffer between the auctioned property value and the mortgage is greater. This means that lenders are more likely to consider lending in difficult circumstances such as an unusual property if you pay a higher deposit.
There are other benefits for borrowers too. With a larger deposit, you will be reducing the amount of money you need to borrow. This provides you with flexibility to get either a lower monthly mortgage payment or reduce your mortgage term and pay off your mortgage sooner.
Having a substantial deposit also gives you the opportunity to bid on properties at a higher value because most borrowers will already be looking at properties at their financial limit with a 10% deposit.
Saving for a deposit need not be difficult, providing you have disposable income. The key here is to ensure you have disposable income each month that you can put toward your mortgage deposit.
Budgeting is extremely useful in ensuring you have a disposable income, and it can even help you increase how much money you can set aside each month.
For example, you may be able to identify expenditure that can be cut such as monthly subscriptions or other sacrifices you can make. You can also take an overall look at your expenditure and save money wherever possible by sourcing cheaper insurance products and reducing the amount you spend on shopping and fuel.
Sell Unwanted Possessions
Over time we accumulate possessions, some of which we no longer use or want. If you are saving for a mortgage, you can easily have a clear out and take unwanted items to a boot sale or list them for sale online.
You might have multiple vehicles and while some may find this is practical, in some cases an extra vehicle is not needed.
You can also use cash gifts from your parents toward your mortgage deposit. If your family is willing to help it might be worth asking if they have any money stowed away they can spare.
Gifting can be practical as well; it is common for children to reduce their inheritance in return for accepting a cash gift for a mortgage deposit.
Savings Accounts and Investments
Once you have your disposable income, cash gifts and profits from selling unwanted goods you will want to maximise the return on this money.
ISAs, savings accounts, and investment accounts are all options. As Boon Brokers is not regulated to give investment advice, you should discuss this with a qualified and regulated investment adviser.
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In the same way that you should not accept your current bank’s savings account, you should also avoid approaching your bank for a mortgage until you have compared the market.
A mortgage broker will source you the best mortgage for your circumstances with the deposit you have available.
Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage. Boon Brokers provides fee free mortgage advice.
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