By Dan Rowden (Produced end of Jan 2021)
Deposits. What are they? How do they work? How much do you need? I’ll aim to cover these points and other important questions during this blog.
What are deposits?
To start, the obvious question is what is a deposit? Well, in this context of buying your first home a deposit is your stake within the property that you’re buying – the money that you are putting down. It’s essentially your share. The rest of the money that will get you the keys to the property is going to be the mortgage. The key thing to remember it’s that the deposit is your stake.
Secondly, it’s very important at the moment, unlike in the past, to know that whenever you buy a house as your main residence you have to put down some deposit. I’ll come onto the details of minimums etcetera shortly, but the bottom line is that some deposit is always required. Back in the day, there used to be 100% mortgages where zero deposit was required, but they don’t exist really in the current market. On this note, it’s quite likely that whilst doing your own research you may have seen something referred to as a loan to value. Loan to value directly relates to deposit because it is the percentage of the loan, i.e, the mortgage, compared to the value of the house or the property that you’re buying.
To give a simple example, if you were buying a house for £100,000 and you had a £90,000 mortgage, that would be a 90% loan to value mortgage. And to flip the coin the other way around, 90% loan to value mortgage is a 10% deposit (£10,000 in that scenario). So, loan to value and deposit are intrinsically linked.
How much deposit do you need?
So how much deposit do you actually need when you’re buying your first home? The short answer is: it depends, but the more the better. I appreciate it’s easier said than done, but the more deposit that you have, the more options, the lower the rates, et cetera. The reason the rates are lower is that if there’s a larger deposit (without getting into all the technicalities) it’s a lower risk for the lender. This means they’re happy to offer lower rates. So, the more the better is the first thing.
If we’re looking at the market now (so we’re at the end of January 2021) COVID has had an impact on the mortgage market. Firstly, one of the things that has changed at the moment is the minimum deposit for a standard purchase. When you’re not buying through any special schemes the minimum depoit is 10%. So if you’re buying a house for £100,00, a £10,000 deposit is needed. That’s the key thing to remember.
Secondly, deposits work in tiers, usually 5%. So if you have a 10% deposit, (as I said, that’s the minimum right now in January 2021) but if you have a 15% deposit, you can get a lower rate and/or wider choice. The lenders will be a little bit more flexible. If you have a 20% deposit the same again, more choice, lower rates, a bit more flexibility. The very best rates are available with a 40% deposit but for obvious reasons most first time buyers tend to go with a 10% or 15% deposit.
Back before COVID hit last year in 2020, it was actually very common to get 5% mortgages as well which obviously helped first time buyers because as we all know, raising a deposit is not mega easy. However, as I said, for a standard mortgage in the current market, a 5% deposit is almost impossible. We expect them to come back at some stage, but right here, right now, really a 10% deposit is the minimum. There is one caveat to that though, if you are buying through the help to buy equity loan scheme in England, Scotland and Wales, technically your deposit is 5% of your own share. I’ll come on to the details of that later, but strictly speaking, 5% deposits are still available, however, they’re only available on the help to buy equity loan scheme, which is just for new build properties. So if you’re looking at a standard property that’s a resale, whether it’s a flat or a house, really, 10% deposit is what you need.
What is the help to buy equity loan scheme?
So I touched on the help to buy equity loan scheme. What is it and how does it work? Without getting too technical over a video, the big advantage is that it allows you to put down an even smaller deposit because there are options available with a 5% deposit. In addition to that, it’s a 5% deposit on your own share. So in other words, it’s not 5% of the full market value of the property, it’s 5% of your share. Obviously, the scheme works differently because in essence, you get a loan from the government in addition to the mortgage.
It’s more complicated, but if you’re in a situation where your deposit is a stretch and you are particularly looking for a new build property, the help to buy equity loan scheme has already helped lots of people in the UK and continues to help. We have access to all of the lenders and mortgages available for that particular scheme. The main thing to remember is if getting a 10% deposit on a standard purchase right now is too much of a stretch and you’re interested in a new build, there might be some options there with a smaller deposit.
How can your deposit be made up?
So how can your deposit be made up? What constitutes a typical deposit when people are buying their first home? Well, obviously the most common scenario is people’s own savings. This could just be a standard cash ISA for example, or it could be the help to buy ISA (which is no longer available but was available until fairly recently and is a scheme provided by the government alongside the lifetime ISA). I’ll go into those in a bit more detail shortly, but in essence, they were schemes that were brought about (the lifetime ISA is still currently around) to help first time buyers get onto the property ladder by boosting the value of their savings. So, savings are the first and most common scenario.
The second most common scenario is the bank of mum and dad, or the equivalent – the bank of grandparents is also quite common. This is where usually a family member, but not always (it is sometimes friends or others), gift some money towards that potential first time buyer getting their deposit. Lenders across the board are quite happy with this. It’s very, very common for obvious reasons. All the lenders really want to do is a check just to make sure that the money is coming from a legitimate source and it’s all kosher. Other than that, it’s very typically used. So that’s the second most common.
I would say the third one I see in terms of how people’s deposits are being made up is inheritance. That’s the third and final one I would say. There are other scenarios that people have but generally, the vast majority of cases are one of those three scenarios or a combination of them.
What is the help to buy ISA?
So lastly, I just want to cover a quick summary of the help to buy ISA. It is, as I said, no longer in existence for new applicants, but there are still quite a lot of people that have a help to buy ISA from back along when it was available. The lifetime ISA is still available as of January 2021. These schemes, as I said before, were set up by the government to boost the value of your savings by essentially giving a bonus payout, as long as they are used to buy your first home when you draw down the money. It’s a bit technical to go into the full details but in essence, that is how they work. For people that have a help to buy ISA from a few years ago that can still be used. If you were looking to get a help to buy ISA now it wouldn’t be possible.
However, it is possible to get a lifetime ISA which works slightly differently because it can also be used for retirement, as opposed to just buying your first home. They’re not an identical product, they are slightly different, but a lifetime ISA works similar to the help to buy ISA. So keep these in mind.
Just to make it crystal clear, it’s not like the help to buy equity loan new build property scheme; you can use these ISAs for a normal purchase of a flat or a resale property. Hope that helps and we’ll speak soon.