How to buy a home with a low deposit
If you are looking to purchase a property and require a mortgage you will need to save a deposit. Most lenders would prefer if this deposit was a minimum of 20% of the purchase price and then they would lend the balance of 80% by way of a mortgage.
The higher the deposit you have available the easier it will be to obtain a mortgage, as the risk for the lender is reduced. In addition, having a higher deposit will also reduce your monthly mortgage payments. That all being said, there are ways that you can buy a home with a lower deposit and in this article, we look at the ways that this can be acheived.
What is a low deposit mortgage?
With the average first-time buyer property now costing in excess of £200,000, getting together a deposit of £40,000 is no easy task. Obviously, lenders need to lend money, so many of them are offering low deposit mortgages with deposits as low as 5% on some mortgage deals. This could reduce the deposit required on a £200,000 house purchase to as little as £10,000.
How small can my deposit be?
Technically the days of 100% mortgages are over as most lenders will not even consider them as they leave the lender too vulnerable to default. However, there are certain scenarios where a 100% mortgage is possible, such as a guarantor mortgage and I will deal with this later in the article.
A deposit of 5-10% as a minimum will give you a good chance of securing a low deposit mortgage as long as the following criteria are met.
To secure a low deposit mortgage you should have:
- A good credit history
- A good employment record
- Confirmed savings
- Low and controlled debt
One other thing to be aware of is that the interest rates on low deposit mortgages are often higher than those available on mortgages with a higher deposit. This is due to the greater risk to the lender of losing money on a default.
If you want to see some comparison costs for your proposed mortgage visit our Mortgage Best Buy Table where you can find mortgages matching your criteria in seconds.
Are there any government schemes for buying a home with a low deposit?
Yes, there are a couple of schemes available to those that require additional help to buy a home and we go into each of them below
Shared Ownership mortgages are part of a government scheme that gives first-time buyers, and anybody that does not own a home, the opportunity to purchase a share in a property. The purchaser arranges a mortgage on the share they agree to purchase (usually between 25% & 75%) and pays rent to a housing association on the remainder. The purchaser only needs a mortgage for the share of the property they are purchasing and therefore the deposit is a lot lower compared to the amount that would be required when purchasing outright. The purchaser will then have the option to increase their share over time and in most cases can eventually own 100%. The purchase of future shares in a property will be subject to the value of the property at the time so it is likely to be more expensive as time goes on.
To purchase a property through a shared ownership scheme your household income must be less than £80,000 (£90,000 in London) and you must either be a first-time buyer or a previous homeowner who cannot afford to buy now. Alternatively, you will need to be renting from a council or housing association.
Can I sell my property under shared ownership?
Yes, you can sell your property even if you do not own 100%, however, the housing association has the right 'to first refusal' for 21 years after you first purchased your home. If you don't own 100% of the property when you decide to sell, the housing association can choose to find their own buyer.
What are the advantages of shared ownership?
A good way of getting a foothold on the property ladder or buying a bigger home than you would otherwise be able to afford. The overall monthly costs may reduce your monthly outgoings compared to renting a property allowing you to save towards purchasing a larger share of the property in the future.
What are the disadvantages of shared ownership?
If you own your property through a shared ownership scheme you may find your hands are tied when it comes to selling at a later date. The housing association has the right of 'first refusal' for 21 years after you first purchased your home making it especially difficult if you need a quick sale. There may also be restrictions on what you are allowed to do in the property such as alterations or having a pet.
Visit Help to Buy - Shared Ownership for more details and how to apply.
How do I get a shared ownership mortgage?
If you buy a shared ownership property, you’ll need a shared ownership mortgage for the proportion of the property you buy. You’ll typically need a 5% deposit, rather than the 10% required for most other mortgage deals.
Not all lenders offer shared ownership mortgages but we have teamed up with Habito one of the leading online mortgage brokers in the UK who can source mortgages from the whole of the UK mortgage market. To read more about Habito check out our article - Habito Review: The best online mortgage broker for you
Help to Buy equity loan
A Help to Buy equity loan is a government scheme that lends the purchaser up to 20% of the cost of a new home with the purchaser providing a 5% deposit and a mortgage arranged for the balance of 75%. In the Greater London area, the government scheme will lend up to 40% of the purchase price.
For the first 5 years, there is no interest charged on the 20% government loan. The Help to Buy equity loan is only available on new build properties up to the value of £600,000. You won’t be charged loan fees on the 20% loan for the first five years of owning your home, however, after the fee-free period has ended, interest will be charged at 1.75% of the outstanding amount and this will increase annually by RPI plus 1%.
For more information watch our video - What is the Help to Buy equity loan scheme?
Are there any other options for buying a home with a low deposit?
If you have a friend or family member looking to buy a property you could pool your resources and purchase a property together using a joint mortgage. Everyone named on the mortgage will be responsible for making repayments. You can decide the equity share of the property amongst all parties which will be the percentage owned if the property is sold. Typically joint mortgages are granted for two people but some lenders will consider up to four people.
Arranging a joint mortgage on a property will show up on your credit record and you will be linked by association with all other mortgagees. This may present a problem in the future if any of the mortgagee's credit status deteriorates as it could have an impact on your own credit status.
A guarantor mortgage is where a parent or close family member takes on some of the risk of the mortgage by acting as a guarantor for the loan. This usually involves them offering their home or savings as security against the loan, and agreeing to cover the mortgage payments if the homeowner defaults (misses a payment). Having a guarantor will increase the chances of obtaining a mortgage.
Careful consideration should be given before being party to a guarantor mortgage as you are essentially making the guarantor liable for your mortgage payments in the future. It may appear an easy solution to a problem but may result in serious financial consequences for the guarantor that they may not foresee when initially agreeing to this arrangement. Job losses, relationship breakdowns or family disputes can easily turn a good idea into a financial nightmare.
It may be tempting to obtain an unsecured loan or use a credit card for the deposit on a property but you need to be aware that interest rates on unsecured loans are much higher than typical mortgage rates and for shorter terms, therefore, making the monthly payments high. Whilst you may have plans of clearing the unsecured loan quickly, this may be difficult to achieve once you have moved into your home and are liable to the additional costs involved in owning a home.
Also, it may be worth remembering that, prior to completing the property purchase, lenders will want to know where your deposit is coming from and may withdraw any mortgage offer if they discover a new unsecured loan has been arranged.
Saving up for a deposit is hard for most people, however, if you are able to save a larger deposit you will be rewarded with a lower interest rate and a larger panel of lenders to choose from. If you are finding it hard to save for a deposit then you should look into government schemes such as the shared ownership scheme or the help to buy equity loan scheme and you may find our article 'The best budgeting apps in the UK - how to budget without trying' useful.
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