Deposit

In this episode, we discuss the basics of a mortgage deposit such as what is it? How much do you need? How to save money for it? Listen below to find out more.

Hello and welcome to this podcast brought to you by Charles Cameron and Associates. Today we will be discussing what a deposit entails for the purchase of a property. So, lets dive in to some frequently asked questions…

What is a deposit?

Quite simply, to buy a property you can borrow money from a mortgage lender to finance the purchase but you will be expected to contribute some of your own money, as currently you cannot borrow 100% of the amount needed. The money that you contribute is called a deposit.   The deposit can come from a variety of sources such as cash savings, equity in an existing property, investments, an ISA or a gift from a relative who is willing to assist you. The deposit monies will need to be transferred to your solicitor before the purchase can complete.

How much is needed?

The minimum deposit required for a purchase is 5% of the purchase price, though depending on the affordability of the mortgage, the value of the property or the property itself, the deposit requirement could be more than 5%. For example, for a new build flat, lenders will require a larger deposit than 5%.

What affect does the size of deposit have on mortgage interest rates?

Typically, the higher percentage of deposit that is used can reduce the interest rates offered by lenders.  Mortgage Providers will tend to offer higher interest rates for higher loan to value mortgages in order to de-risk themselves against negative equity.

Interest rates and the range of available products change with each 5% deposit provided, meaning that with a 7% deposit for example, you would still be offered rates at 95% LTV and would need to provide an additional 3% to qualify for the next LTV range of rates offered.

What is LTV?

LTV (or Loan To Value) is quite simply the size of the mortgage loan that you are borrowing from a lender against the value of the property in question.
So, the purchase price minus your deposit = the mortgage loan amount

The mortgage loan amount vs the purchase price = Your Loan to Value (LTV) bracket

The lower the Loan to Value = the most competitive Mortgage Interest Rates available

How does the LTV impact on repayments?

As we have discussed, the lower the loan to value, the lower the interest rates tend to become. This means that with a lower loan to value, your monthly repayment amount will be lower. This is because you would qualify for a lower interest rate as well as the fact that you will be borrowing less.

Lets see this in an example with some non real-time rates.

If we assume a property value of £340,000 and use a  deposit of 10% (£34k), the LTV is 90%. We’ll assume a rate of 6.46%. this would result in a monthly repayment figure of £1,926.

In contrast, with a deposit of 20% on the same value property (£68k), the rate offered here could be 5.98% as the ltv is 80%, resulting in a monthly repayment figure of £1,627. This repayment has reduced due to the lower interest rate and lower loan size. The additional £34k deposit could reduce the monthly repayment by nearly £300 per month.

Gifted Deposit – Who can gift, type of docs needed (in / out UK)

In order to purchase a property, a buyer can receive assistance in the form of a gifted deposit. But this type of deposit from a third party does need to meet certain conditions depending on the lender in question.

Firstly, a gift is required to be a pure gift with no expectation of repayment nor any interest in the property to be held by the donor.

Secondly, the donor will usually need to be a close relation to you. If a more distant relative or other third party would like to help with your deposit, you will need to discuss this with your adviser to see if it would be accepted by any lenders.

Thirdly, the origin of the monies will need to be assessed by the lender by reviewing the donors bank statements, ID documents and confirmation of which country the funds originate from. For a purchase, a solicitor will act on behalf of the purchaser and the mortgage lender, so they will therefore need to do their necessary due diligence and anti-money laundering checks on the gifted funds in order to report this to the mortgage lender.

This list is not exhaustive however and lenders may need to carry out additional checks or receive additional documentation in order to accept a gifted deposit. If you have any questions about a gift you may receive for a property purchase, one of our advisers is always on hand to answer any questions you have.

How to save – Lifetime ISA & Budgeting Tips

First time buyers can benefit from The Lifetime ISA (LISA), a long-term savings product intended to support younger people who are saving for their first home, or for later life.

• This account can be opened if you are aged 18-39 years old
• You can save up to £4,000 each year tax free
• You will receive a receive a 25% government bonus on your savings when you use the savings to buy a residential property up to £250,000 ( or £450,000 in London)
• The accounts are Tax-Free
• And LISA’s are for individuals, so two first time buyers buying together can both save into these accounts and both receive their government bonus.

But an important note is that these funds can be used to purchase a first home from 12 months after opening a LISA. If you withdraw the funds for any other reason than a first property purchase (or are terminally ill, or reach age 60+) you will have to pay a withdrawal fee of 25%.

First-time buyers who already hold a Help to Buy: ISA which was withdrawn from the market at the end of 2019, can continue to save into their accounts  until November 2029 and have until December 2030 to claim up to a maximum £3,000  government bonus towards the purchase of their first home.

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