Can You Use House Sale As Deposit?
For homeowners looking to move up the property ladder, an important question is whether the equity in your current home can be used to fund the deposit on a new mortgage. This would avoid needing to save a lump sum for the deposit separately. But are lenders willing to accept future house sale proceeds as a deposit source?
This article explores the complex area of using expected equity or sale funds for mortgage deposits, looking at:
- Why buyers want to use sales to fund deposits
- Challenges and risks for lenders
- Lender requirements around proof of funds
- Bridging finance options and suitability
- Using equity release schemes
- Protecting buy-to-let sale proceeds
- The pros and cons of different approaches
- How to maximise chances of approval
By analysing the topic from both buyer and lender perspectives, it provides a comprehensive overview of both the motivations and obstacles around utilising future house sale funds as deposit capital when moving up the ladder.
Why Buyers Want To Use Home Sales For Deposits
For existing homeowners, a major attraction of using the impending sale funds from their current property to finance the deposit on a new home is that it avoids tying up capital unnecessarily.
Rather than needing to save up a 20-30% deposit lump sum independently which could take years, they can use the equity they expect to redeem from selling their existing house once it completes its sale.
This avoids needing bridge loans between selling and buying and stops buyers from paying double mortgages and rent during the buying process. It also maximises the amount of capital available to put down as a deposit on the next property.
Being able to recycle sale proceeds directly into the new property deposit enables moving with speed and convenience rather than having to amass savings over time before trading up the ladder. The next rung can be climbed as soon as buyer demand enables the sale of the current home.
This efficiency and flexibility is why many wish to use future sale funds to purchase their next home. But Significant obstacles deter many lenders from accepting this.
The Risks and Challenges For Lenders
From a lender’s perspective, relying on expected proceeds from an impending house sale as deposit funds carries multiple risks they must carefully manage:
The planned sale could fall through due to issues like gazumping or the buyers pulling out. This leaves the new purchase deposit incomplete.
Delays could impact the current property sale, meaning funds are unavailable in time for the deposit due date on the new mortgage.
The seller could achieve a lower sale price than expected, reducing equity available for the onward deposit below the levels required.
If the buyer’s own home takes longer to sell than the purchase, they may face a period without funds for the new mortgage payments.
The seller’s property could go into negative equity, leaving insufficient equity to redeem against the new purchase deposit.
All of these risks around availability, timing and sufficiency of funds mean lenders must impose strict criteria when buyers propose using sale proceeds for deposits. This aims to mitigate the risks for the lender should the seller’s assumptions prove inaccurate.
Evidential Requirements From Lenders
To satisfy lenders that funds from a planned sale can be relied on, mortgage applicants will need to provide substantial evidence that the expected sale proceeds are highly probable.
This will include showing proof of:
- The current estimated property value via approved valuers
- Local area demand conditions confirming realistic saleability
- The minimum sale price needed to redeem capital for the deposit
- Conveyancer confirmation exchange is imminent with penalties if the sale falls through
- Signed offer letter from the buyer including conditions and timeline
- Proof the sale chain is finalised and all parties ready to exchange
- Minimum equity buffers allow for downward valuation changes
Essentially, lenders will assess risks around the availability, sufficiency and timing of the expected proceeds. Where uncertainties exist, further contingencies like bridging finance may be required to satisfy them lending against sale funds is adequately de-risked.
Utilising Bridging Finance Options
If lenders remain concerned uncertainties around the house sale could jeopardise deposit availability for the onward purchase, borrowers may need to secure bridging finance as a contingency measure.
Bridging loans provide short-term finance secured against the existing property to cover the deposit in case the sale is delayed. This provides assurance the deposit will be available on time, repaying the Bridging loan when the sale is completed.
For sellers, this avoids paying double mortgages if the sale falls through. For lenders, it ensures the deposit will be covered even if the buyer’s sale faces obstacles.
Bridging finance therefore offers a solution allowing sellers to use impending sale funds for their next deposit while giving the new lender comfort if risks materialise. It bridges any timing gaps between the two transactions.
But bridging loans add cost and will still require evidence that the current property sale should reliably proceed to cover repayment. Other options may suit some borrowers better.
Using Equity Release Schemes
An alternative to bridging loans for some property owners is equity release schemes if they meet age requirements.
Equity release involves taking a loan secured against the existing home while retaining ownership so no sale is required. This releases capital that can be used to fund the deposit on the new property. Repayments are then deferred until the eventual sale.
For older borrowers with sufficient equity, this avoids sale risks impacting deposit availability. While fees and interest accrue, it can provide deposit funds without awaiting sale proceeds. Lenders may view this as a lower risk than relying on the buyer completing an imminent sale.
Protecting Funds From Buy-To-Let Sales
Another option for buy-to-let landlords is to sell one or more existing properties to raise the deposit for purchasing a new residential home to occupy.
However, lenders will be cautious about accepting projected buy-to-let sale funds. Additional proof will be required showing tenants are in place and there are no voids, arrears or major works pending. This provides confidence saleability and values are assured.
Utilising some of the sale proceeds to pay down existing buy-to-let mortgages before redeeming funds for the deposit will also provide more comfort. It proves surplus equity while reducing the risk of shortfalls from delayed sales.
Again, bridging finance could protect against unforeseen delays, allowing landlords to reliably use buy-to-let sale proceeds for their next property purchase deposit.
Pros and Cons of Different Approaches
Each approach for generating deposit funds from existing property sales has pros and cons that buyers and lenders must weigh up:
Relying solely on the impending sale leaves the risk of delays impacting mortgage completions. But if sale certainty can be proven, it avoids the costs of alternatives.
Bridging finance provides a contingency buffer but adds fees and repayment obligations. This protects against sale risks but reduces disposable equity.
Equity release avoids sale reliance while freeing capital. But fees accumulate and debt remains secured against the home.
Selling other properties first provides deposit funds upfront but realising value takes time. This can delay purchasing plans.
No option is risk-free or cost-free, so buyers and lenders must determine which approach best balances their respective motivations and risk tolerances based on the specifics of the scenario.
Maximising Chances of Approval
While lenders will remain wary of sale fund risks, borrowers can maximise chances of successfully using their impending sale proceeds for the next deposit by:
- Seeking mortgage advice early to understand lender requirements.
- Getting realistic valuations and minimum pricing expectations.
- Marketing their property proactively ahead of offers to build urgency.
- Keeping lenders updated on interest levels and conveyancer feedback.
- Having contingent finance options ready if needed for reassurance.
- Documenting sale certainty professionally to address lender concerns.
- Research equity release eligibility if bridging finance is unattractive.
- Clearing any buy-to-let arrears and maximising occupancy if selling.
With thorough preparation and planning, borrowers can often persuade lenders to approve the use of future sale funds for deposits with prudent risk management contingencies where required.
While using the impending sale of an existing property to provide deposit funds for a new purchase is attractive for buyers, lenders will rightly exercise caution around risks, including scenarios involving auctioned houses for sale. With substantial proof that availability, sufficiency, and timing of proceeds are assured, many lenders will allow borrowers to use sale funds for deposits subject to suitable contingency measures like bridging finance if needed.
This enables homeowners to efficiently unlock their next rung on the ladder without waiting to accumulate savings, provided risk management protections satisfy lender concerns. For both buyers and sellers, understanding lenders’ deposit requirements is key to successfully funding the next move through the current property’s upcoming equity redemption.