The most recent pandemic has certainly affected the way you get to buy a house. Getting a mortgage is a challenge these days. Most importantly, people will struggle to get the deposit – and this is the aspect that has been through the most significant changes.
A good deposit proves a few different things. First, you are solvent. Second, your financial discipline and stability are rock solid. Third, you represent a lower risk for the lending company. In other words, the bigger your deposit is, the more you are able to get an excellent deal.
The reason behind it? A mortgage is a secured loan. It is secured against your home. If you cannot pay for it, the lender will take it back and sell it in order to make the money back. Since prices go up and down all the time, the lender is taking a gamble.
Now, what else should you know about deposits?
How deposits work
Imagine you have a 20% deposit. In this case, the bank will lose money only if the property depreciates by 20% and you are unable to pay. This is less likely to happen. Overall, while prices fluctuate, they tend to go up overtime. Therefore, the bigger the deposit is, the better the deal and rates will be.
Getting the money for the deposit takes time. There are no shortcuts. You will most likely have to save for it. You cannot loan money for a personal loan and use it as a deposit – banks will know and will reject such applications. You can sell your car, get some money from your family or perhaps an inheritance.
Deciding on the size of your deposit
Long gone are the days when you could buy a house with a 0% deposit. Even before the pandemic, there were better deals out there – 5% or 10%. These days, you will find it impossible to get a mortgage with less than 15%. You will get a great interest rate if you go for 20% of the actual value and incredibly good deals if you bring in 40%.
Just like you have probably guessed already, the bigger the deposit is, the better your deal will be. The jump from 5% to 10% is massive, but not really doable now. If you can push yourself up a band, it is definitely worth it. You will most likely save a fortune over the next years – even up to the whole size of your deposit.
For a 10% deposit (difficult to find), the interest rate will float around 3.24%. Come up with 20% and the rate will go down to about 1.75%. That is about £4,000 for a house that costs around £200,000. A 25% deposit will reduce the rate to about 1.20% – similar to 40% too. Of course, when analysing such numbers, you must individualize your calculations based on the property price and the duration of the loan. Different banks come with different deals, so it might be a good idea to sort the mortgage out through a broker.
Bottom line, a low deposit looks like a good idea. You can buy your house faster. While it is more expensive, you could save up for not renting – after all, renting is money down the drain. But then, you still have to do some calculations. Sometimes, it might be worth taking that extra renting expense while you keep saving – it may still be financially better than getting a house with a low deposit.
Every option must be weighed in the smallest details to ensure you come up with the best plan.