In a country where you can pre-plan your funeral using websites like My Net, one may be tempted to believe that finding a loan provider to grant you the funding you need to secure your dream home shouldn’t be so difficult. Well, brace yourself, becoming a homeowner in the UK is never easier today than it was several years back and the same requirements still stand, albeit with little tweaks of course. In our current day and age, one of the basic requirements is that you have to make a deposit payment before you are granted a loan by your provider. In the current UK market, you’ll typically need to make a minimum deposit of 5% of a property’s value before you are granted a mortgage. So, for instance, if your dream home is worth ₤500,000 in value, you would need to make a minimum deposit of ₤25,000, and borrow ₤475,000. But in reality, many homeowners often deposit above the minimum for good reasons that will be explained within the context of this article.
Factors that influence your mortgage deposits
More often than not, prospective homeowners usually have to save up to raise enough money to pay for their deposits. So due to this, it is always important to consider some factors that may influence your deposit fee.
Typical property prices in your chosen area
The type of house you intend buying and the area where it is located are two factors that can influence your minimum deposits. So the higher the property prices in your chosen area, the higher your minimum deposit is likely to be. You can catch a good view of this on the UpSave website.
Your target monthly payments
Another factor worthy of consideration is your monthly payments. If you cannot afford hefty monthly payments throughout the term of your mortgage, then, you are better off saving ahead for a bigger deposit, knowing full well that the higher your deposit, the lower your subsequent monthly payments.
Reasons to save a bigger mortgage deposit
While 5% remains the minimum deposit most UK loan providers would request of you, there are plenty of reasons to save more if you can.
Cheaper monthly payments
With so many other financial obligations to attend to, most homeowners would rather make bigger mortgage deposits if it means paying little in monthly payments subsequently. Although it seems obvious, the bigger your mortgage deposit, the smaller your loan will be, and invariably your monthly payments will be lesser too.
Better mortgage deals
A larger deposit will indeed make you less risky for mortgage lenders, and as a result, they’ll generally offer you lower interest rates. In fact, according to a 2018 statistics, it was discovered that the average rate on a two-year 95% mortgage was 3.6%, while for 90% mortgages it was 2.79%.
Cut out the possibility of debt
One of the reasons why many people dread loans is because of the possibility of running into debt. But if you’ve settled a large part of your home payment through your initial deposit, there would be little for you to dread since you will only have to take a smaller loan to complete your home purchase. Consequently, you would have cut out the possibility of having to deal with hefty monthly payments which often lead to debts.
Improved chances of approval
It is a common practice with mortgage lenders to conduct affordability checks on prospective borrowers to determine whether or not they can afford their mortgage repayments. These checks are usually based on your income, debt-to-income ratio, and overall expenditure. No lender takes joy in chasing after monthly payments, but they need to be sure that you have what it takes to stop bailiffs from knocking on your door. But if you only put down a small deposit, it’s more likely that you will fail these checks because you’ll need to spend more on your mortgage payment each month.
Did you know that if you own a reasonable part of your home cost outright, you are less likely to find yourself in the negative equity position? A negative equity position is a situation whereby the mortgage you owe on your property is more than your current home value.
If ever push comes to shove and you default on your loan repayment, your initial deposit – provided the sum was quite substantial – could serve as your ultimate bargaining power. If, for instance, you decide to use schemes like trust deed to negotiate your settlement, lenders would be more considerate to sit and negotiate with you since you’ve cleared a reasonable part of the loan through your first deposit and whatever monthly payments you’ve made before your defaults.