First-time buyers need to know these key things about deposits before buying their first home

Posted on Tuesday, August 23, 2022

Homeownership is something that the majority of people in the UK strive for.

Buying your own home is high on the list of things to do as we grow into adulthood. 

We are "supposed" to graduate from University, get a good secure job, settle down, and buy a property. 

But, the press is often filled with reports about what they call "Generation Rent". An entire generation unable to get on the housing ladder and are destined to live in rented accommodation forever. Thus making the dream of homeownership even less attainable to the average person.  

House prices are increasing at an astonishing rate and far outstripping the average salaries. And mortgage lenders are looking for an impossible ideal candidate that has no debts. A tall order at a time when new graduates are leaving University with exceptionally high student loans. 

Perhaps homeownership is so aspirational to most young people today because it is difficult to achieve.  

The average age of first-time buyers in the UK in 2007 was 30. But, by the end of 2017, that had risen to 33. 

But, back in 1980, it was just 28 years old. As a nation, we are waiting longer before buying our first home. 

So, how is the average person in the UK expected to get on the housing ladder?

It would appear that the main hurdle to getting on the housing ladder is the need for a deposit. Saving up a deposit is almost impossible when you simultaneously pay rent and other household costs. 

Most buyers, it seems, are withdrawing from the 'Bank of Mum and Dad'. Parents are gifting their offspring the deposit amount to help them buy their first home.

What is a deposit?

A deposit when buying a property is your own contribution to the purchase price. Your 'skin in the game', if you like, protects the mortgage lender against negative equity if they have to repossess the property in the future.

Why do you need to pay a deposit?

Mortgage lenders are looking for a contribution from the lender. They want to know that you are committed to the property as, if you are, you will be more likely to pay back your mortgage debt. 

A deposit protects the lender from any market price drops. The equity is always lost first when a property value goes down, not the loan amount. Suppose there was no equity, i.e., no deposit funds from you. In that case, there is no protection for the lender against negative equity.

Of course, it's not a fail-safe option. A repossession is inevitable if people stumble upon hard financial times and mortgage payments are missed. Lenders believe a homeowner is more likely to make the payments and keep their property if they risk losing their own money. 

How much?

Usually, a property purchaser will be asked to commit a minimum of 10% of the purchase price. However, a first-time buyer can purchase with just 5%. This is thanks to Government incentives as they've realised that first-time buyers simply can't acquire enough deposit funds to enable them to purchase a property. So, the government will insure the other 5% of your deposit amount with the lender. 

When the lenders began requesting a 10% deposit from all purchasers, the sales to first-time buyers virtually dried up; hence they introduced these incentives. 

When do you pay?

You make your deposit payment just ahead of the exchange of contracts. Your solicitor will request it from you so that they can proceed with the exchange and make your purchase legally binding. Very shortly after, you will complete your purchase and get your keys. 

So, suppose you are purchasing a property today. In that case, you will likely not need to send the deposit payment to the solicitors for 2 or 3 months. Although the agent, solicitor and mortgage lender will need to see evidence that you have access to the funds from the outset. This can either be proof of your savings or confirmation that you will be receiving a gift from someone for that amount. 

All in all, buying a property is an expensive thing to do. 

But, the money you spend on a deposit isn't paid as such; it's invested. You still own that money. It's just tied up in the property rather than in the bank. 

If you'd like to speak to a financial advisor or want to be kept informed of properties as they come onto the market (before they hit the property websites), get in touch with us today.

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