I often get clients coming to me saying they want to buy their first home but only have a small deposit. If you are in that situation, you are not alone. Thousands of other homeowners find themselves in that situation and have managed to get their first foot on the property ladder. Here I will talk you through what you need to do.
The mortgage deposit is a lump sum of money that you pay upfront when you buy a house. Most lenders will require a minimum of 5% of the value of the property that you are purchasing. The bigger the deposit, the smaller the mortgage will be that you need to take out.
In the first instance, you want to try and build up your deposit and save as much as you can.
Saving for a deposit
- Record your expenses – The first step to saving money is figuring out how much you spend! Take note of all the expenses you have and organise them into categories. Make sure you are as accurate as possible and don’t miss things out such as daily coffee trips! These all add up.
- Slash your spending – try to ensure you are doing everything you possibly can to save towards your deposit. Thinking of ways you can cut your spending might help you to realise it is time to cut back on certain things. Identify any non-essentials that you can spend less on, such as dining out, coffee stops or memberships that you don’t use and really think twice about any big purchases.
- Create a savings pot – Once you have got an idea of how much money is coming in and how much is going out in a typical month, you can start to think about your overall budget. Add some additional spending in there for things that come up less regularly such as car maintenance or house repairs. Include a house deposit savings category in this and aim to try and save 10-15% of your income.
- Use a saving/budgeting app – To make it more simple, you could download a budgeting app such as Plum or Yolt, which makes it easier for you. Saving is much easier when you don’t have to do as much guesswork yourself. Or you can print out my Budget Planner to help you manage your budget.
What if I’ve done all of the above and only have a small deposit?
There are certainly options available to you even if you have a relatively small deposit.
Buying a house with a 5% deposit
Mortgage Guarantee Scheme
As a result of the coronavirus pandemic, most banks and building societies stopped offering 95 per cent loan to value mortgages. But the good news is that 5% deposit mortgages are back available and in April 2021 a new guarantee scheme was launched for this.
There are some criteria that you must meet in order to qualify:
- You must have a deposit of between 5% and 9%
- Any homebuyer can apply for a mortgage, not just first-time buyers
- Unlike the Help to Buy shared scheme, the property does not have to be a new-build home
- Buy-to-let properties and second homes are excluded
- Interest-only mortgages are not allowed, the mortgage must be capital repayment.
- The purchase price of your home cannot exceed £600,000
- The mortgage must be taken out by an individual not a company
You might want to consider alternative 5% deposit mortgage schemes such as the Help to Buy equity loan and shared ownership schemes.
Help to Buy Equity Loan Scheme
The Help to Buy Equity Loan scheme allows first-time buyers to purchase a new-build home with just a 5% deposit.
How does it work?
It is a loan from the government that you put towards the cost of buying a newly built home. You can borrow a minimum of 5% up to a maximum of 20% (40% in London) of the full purchase price of a new-build home.
The equity loan, the deposit that you have saved, and the repayment mortgage will cover the total cost of buying the home. You won’t pay any interest on the equity loan for the first 5 years, you only start to pay this in year 6 on the equity loan amount that you borrowed.
For the first five years, the equity loan is interest-free and you only pay a monthly management fee of £1. When you get to year 6, you will pay the £1 monthly management fee and pay a monthly interest fee of 1.75% of the equity loan. The interest rate will then rise each year in April with the Consumer Price Index (CPI), plus 2%. You continue to pay interest until you pay off your loan in full.
You must repay the equity loan in full at the end of the equity loan term, when you pay off your repayment mortgage, or when you sell your home. You must adhere to the terms set out in the contract otherwise you may have to pay it back in full at any time. The amount you pay back is worked out as a percentage of the market value at the time you choose to repay. You can read more about this scheme in my recent blog here
If you do not meet the eligibility criteria for this, you might also want to consider Shared Ownership, as this scheme allows you to buy a share of a property and pay rent on the rest. You will need a much smaller deposit as you only need a mortgage for the share of the property you are buying. For example, if you planned to buy a 50% share of a property worth £300,000, the value of your share would be £150,000. So you’d need £15,000 to put down a 10% deposit or £7,500 for a 5% deposit.
Each lender is different in what they are currently offering. Some are only partaking in the mortgage guarantee scheme and some are offering mortgages with a 5% deposit outside of this. It is best to speak to a Mortgage Adviser like myself, who will be able to advise you on your options.
If you are a first-time buyer looking to get onto the property market, get in touch today.
At KB Mortgage Services, we can help find you the best deal and save you money over the term of your mortgage.
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Note: Your home may be repossessed if you do not keep up repayments on your mortgage. You may have to pay an early repayment to your existing lender if you remortgage. Second charge mortgages are arranged by introduction only.
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