How to buy a House With a Small Deposit
If you’re looking to become a homeowner – whether for the first time, or as a seasoned veteran of the property purchasing world – it’s a sure fire guarantee that one of the most significant stumbling blocks you’re going to face is saving for a deposit.
While it’s certainly the case that mortgage repayment rates aren’t as affordable as they were in years past, one of the largest challenges – particularly to first-timers – is that the house deposit is far too much for most people to pay. Here, we explore the challenges and some possible ways to get onto the property ladder.
The deposit debacle
Despite the Government’s best attempts to make housing more affordable though schemes like Rent to Buy and half price mortgage deposit schemes, the truth is, there’s just not enough available housing on the market.
This reduced stock has created an investor’s dream: a large-scale shortage producing a sellers’ market in which house prices are solely market determined. And in a market such as ours, this means housing prices have sky-rocketed. So, too unfortunately, have deposits.
Shockingly, the average deposit in the UK stands at £33,000 – which rises to almost £115,000 in London. For the vast majority, saving that kind of money – whether or not they’re renting – is near impossible.
So, with the housing market in such a state, and buyers struggling so much with deposits and finances, what possible solutions are currently available to people who can only afford small deposits?
We briefly mentioned first-time buyer mortgages above, and generally, these have lower mortgage rates than generic mortgages, However, some come with the ability to allow somebody (usually a parent) to act as a guarantor on your behalf.
The guarantor will need to be able to pay your repayments on time if you’re unable to do so, so one possible downside to this is that you’ll really need to be able to trust the person acting as your guarantor.
Buy at auction
Most people don’t have a real problem with paying a deposit for a property, it’s the amount of the deposit that’s the real issue. One way around this is to avoid the administrative and inflated costs associated with buying a property through the conventional method of the estate agents.
Instead, look to property auctions to buy your first home. There, you might be able to snap up a bargain, and while you’ll still have to pay a deposit, it might be more manageable.
Shared ownership schemes can be really helpful if you don’t mind the idea of sharing the ownership of your property with a local authority or housing developer.
Essentially, shared ownership schemes enable you to buy and own a certain percentage of the property – anywhere between 25%-75% – and the rest is rented from a local authority or housing developer. This means that you won’t need to pay as hefty fees upfront, but you will need to factor in the extra rent each month, which can offset the small deposit you initially paid.
Help to buy equity loan
Whilst the help to buy ISA scheme closed in November 2019, the help to buy equity loan is still available – and you don’t need to be a first-time buyer to qualify for it.
To be eligible, the property you purchase must fit the following criteria:
- Cost no more than £600,000 (£300,000 in Wales)
- Be a new build property
- Be the only property you own
- Not be rented out after being purchased
If you meet these criteria, you will only need to put down a small deposit of 5%. The government will lend you 20% of the total cost of the property (this increases to 40% in London), and you’ll need to get a mortgage that covers the remaining 75% of the property’s value (55% in London), making homebuying more affordable.
For the first five years, you won’t need to pay anything back. On the sixth year, you’ll have to pay back 1.75% of the government’s loan back – and this will increase by an additional 1% every year – but by that time, you may be in a position to remortgage.
For this scheme, you’ll need to be aged between 18-39, and not own a property. Once you’ve opened up the ISA account, for every £4 you put in your account, the government will add £1 – worth up to £1,000 for every single tax year.
This means that you can save more than £4,000 a year, but anything over that amount won’t be eligible for a 25% bonus.
To use your lifetime ISA on a house deposit, the home you choose must be valued at £450,000 or less, and not be a buy-to-let property. Also, because the ISA accounts are for a person and not a home; if you’re saving for a property as a couple, you can each open your own ISA account.
Whilst you can use this money for anything you want, if you’re under the age of 40 and don’t use it to purchase a property, then you’ll receive a 25% withdrawal penalty – so basically, you’ll only end up with the money you invested.
This final option doesn’t lower the rate of the deposit, but can help lower the burden of any associated fees. It’s called a bridging loan. These are short-term loans that are made available to help cover the time between selling an existing property and purchasing a new one.
While they can be a great solution if you can guarantee you’ll have the money to pay back the full amount plus (generally high) interest, short-term loans can be a bad solution if you’re not a high earner – so think carefully.
Small deposit mortgage vs large deposit
For many aspiring homeowners, having the option of getting on the property ladder with a small deposit is a dream come true. However, if you’re able to save for a larger deposit, which is the best option to choose?
Why save a larger deposit
- You’ll get better mortgage deals: You’ll be seen as less risky to lenders, so in general, they’ll offer you lower rates.
- Cheaper monthly payments: The bigger your deposit, the smaller your mortgage, which means the less you’ll need to pay back.
- Better chance of being accepted: Lenders will carry out affordability checks to determine if you can afford mortgage repayments. Because the payments on a large deposit are less, you’ll therefore have a better chance of passing these checks.
However, if saving for a 20% deposit is going to take you an extra five years, and you already have a 5% deposit available, then it can often make sense to purchase a property, using these options above, so you don’t have to pay dead rent money.
Ultimately, there are a few ways to get around the generally high property deposit mortgages on the market today. The best thing to do is work out your finances, and then consider each of the ideas above to see what works for you.
Alternatively, if you have a house that you want to sell quickly, then get in touch with us today to receive a free cash offer.