Financing your first home
Getting together a deposit
A deposit is the amount of money that you will be required to provide towards the purchase of a property, with the balance made up from mortgage finance. The size of deposit may affect the interest rate you pay for some mortgage packages - the more you put down as a deposit, the lower the rate of interest.
A typical deposit would be 5-10 per cent of the price of the property. So, for instance, if you were required to provide a 10 per cent deposit and the purchase price was £150,000 you would need to put down a £15,000 deposit.
If you have savings already, for most people it would make sense to use these to make up your deposit, although you should also consider that you will then have no savings left for emergencies. Failing this, another option may be to approach family or friends for a loan. If they agree to help, they may want you to pay interest on the loan but should consider any potential tax implications associated with this income.
You must consider the impact if you should find yourself, at some point, unable to keep up repayments on a loan or any other long-term commitment associated with a house purchase.
Another consideration is that most lenders will also look at your disposable income when lending you money and will take into account your existing and intended loans. A few lenders may also look at ‘lending you a deposit' as part of the overall mortgage package.
It is important to stress that if this is your situation, it is more important than ever that you take proper advice. It is imperative that you do not overcommit yourself as your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured against it.
We have listed some other options for short-term loans below, but again you would need to be confident that you could afford these methods and be able pay them back when needed and on time.
You may decide to take out a personal loan to use as a deposit. A personal loan is one of the least complicated of the financial products available but you will need to be sure to understand the terms clearly before signing an agreement.
There are two types of personal loans offered by lenders such as banks and building societies:
A secured loan is one whereby the property is used as security on the loan and if you aren't able to pay off the loan according to the terms agreed with the lender, then your property may be at risk of repossession. As a first-time buyer this would probably not be a relevant loan for you, but if a member of your family were to take out a secured loan to help you, he should be fully aware of the risks involved if he defaults on payments.
An unsecured loan can vary in both size and the terms of the monthly repayments, depending on the purpose of the loan. It is a debt that is not secured against an asset or equity. But you must be aware that, as with any debt, if you fail to meet the terms of the loan, the debt can be recovered through court proceedings. An unsecured loan is paid on a monthly basis, usually at a fixed interest rate and over a fixed term.
It's important that you use the Annual Percentage Rate (APR) to compare the true cost of borrowing, as this will factor in fees that might not be included in the ‘headline' rate. A company may quote 'typical rates', which means that the terms apply to any applicant, but the exact rate offered to you will depend on your personal circumstances. If you have a poor credit history you may find it difficult to obtain a loan and if you are offered one, the interest rates may be high. Consider carefully before committing yourself.
You may find yourself in a position whereby you can pay off your loan early but beware - some agreements penalise you for doing this or for varying the amounts you pay. Be sure to check this out before signing on the dotted line.
Some lenders may offer you payment protection. You may also be offered other insurance products as part of a package. Check that you are not already covered, under, for instance, your employer's scheme (you might find you already have ‘long term illness' cover, for example). You will probably find it cheaper to buy different financial products separately rather than in a package but again we stress that you should take financial advice to ensure that you have the correct products and protection for your circumstances.
If you cannot raise a deposit, some mortgage lenders do offer 100 per cent mortgages where no deposit is required but this will be dependent on your circumstances and may result in a higher interest rate because of the risk that the lender is taking.
A major disadvantage of 100 per cent mortgages is that if the value of your property falls, you may find yourself in negative equity. This means that you will owe more than you borrowed and you still have to pay back the lender the original price of the property. If you decide to take out a 100 per cent mortgage you should consider fully what you would do if house prices did not rise, as potentially you could be stuck with a house worth less than you owe on the mortgage outstanding.
There may be many routes available for you even if you find yourself without a deposit. We have listed some ideas for you above but nothing will beat getting proper financial advice tailored to your circumstances. Do not feel that because you may have little or no deposit monies that there are no options available to you. Use our mortgage advice link and talk to a financial adviser, who will be able to explain the possible options in more detail.
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