Is a Deposit Necessary When Buying a Home?

When you are buying your first home, is it necessary to save up a deposit? Saving up a deposit can be an intimidating prospect for many first time home buyers; because they think that it will take them many years to save up enough cash for the deposit on their home.

Although saving money can be challenging, a deposit is quite necessary for buying a home. You need to have at least some savings to put into the purchase, so that you can start with equity in your property. Also, there are many disadvantages to choosing a mortgage with a low deposit. A low deposit mortgage might have a very high rate, because the lender is taking more of a risk on you.

Even the Help to Buy Scheme, a program designed to assist first time buyers in the UK, requires you to contribute at least 5% of the property price as a deposit. The government will then give you a loan for up to 20% of the price and you will need to take out a mortgage for the 75% left over.

Of course, it is possible to buy a home without a deposit – it is just more difficult. Sometimes you might be able to use a guarantee from your parents, which is backed against a mortgage on their property. This equity can help you to make your home purchase and it is known as a family guarantee. Of course, this situation means that if you default on your mortgage, not only you will lose your home but your parents could also be at risk of losing theirs.  Also, your parents might be worried that they will need the savings for themselves when they retire.

So How Much Do I Need for a Deposit?

When you are buying a home with mortgage lenders such as cbonline, you should only start looking when you have saved at least 5% of the purchase price. Ideally, you would save more than this for your deposit, but 5% is the absolute minimum that you should consider.

If you are paying a deposit of less than 20%, you might need to pay what is known as Lenders Mortgage Insurance, which will allow you to borrow a more substantial percentage of the property purchase price. This insurance is usually included in the upfront costs of the loan or spread out over the term of the loan.

Of course, if you can save up to 10%-20% of the home’s value for your deposit, this will be ideal. The more you have saved up for a deposit, the better.

Reasons to Save Up a Larger Deposit

Why should you save up a large deposit? There are many advantages to saving up as much of a deposit as you possibly can, such as:

·         Your mortgage application will be more likely to be accepted if you have a large deposit. This is because the mortgage lender will see you as less of a risk because you have proven that you are in a stable financial situation.

·         Paying a large deposit will reduce the amount of the loan, which means that you will save thousands in interest payments over the years.

·         There are also shorter term fixed rate mortgages that are available to borrowers who pay large deposits, which will save you a lot of money in the long term. This is because banks want to offer low interest rates to low-risk customers.

·         When you invest a large deposit into your home, you will have more equity in your property.

Of course, it is up to you how much you want to save up for a deposit on your first home. You will need to consider a number of factors, such as the price of the home, whether you have an emergency savings fund, your future plans and expenses, your financial situation and much more. For example, spending all of your savings on a deposit might not be wise if you don’t have an emergency fund saved up – as you won’t have any savings to rely on if something goes wrong. Figure out the level of deposit you are comfortable with, so that you can make your first home purchase with ease and keep yourself in good financial standing.

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