Guide to raising a deposit for first time buyers
A story in the Telegraph newspaper on the 11th of August 2018, for instance, reported that the number of first time buyers in the first half of the year had reached a 12-year high of 175,000 – more than double the number of first time buyers recorded in the first half of 2009.
One of the major obstacles for anyone wanting to buy their first home, of course, is the size of the deposit likely to be required – the national average currently stands at some £33,000. So, how might you lay your hands on anything like this amount of cash? Our Guide to Raising A Deposit For First Time Buyers will show some of your options.
How much deposit do you need?
The Consumers’ Organisation’s Which? magazine suggests that you need a deposit equivalent to at least 5% of the purchase price of the home you want to buy. If the home costs £250,000, therefore, you need a deposit of at least £12,500.
But it is essential to stress that the figure of 5% is the bare minimum. The larger the deposit you have to offer, the less you need to borrow, the greater your chances of success in securing the mortgage you need, and the more favourable rate of interest you are likely to be offered by your mortgage lender.
Mortgage lenders take a whole host of factors into consideration when deciding your mortgage application:
- your earnings – and that of your spouse or partner, if you are looking for a joint mortgage;
- not only the types of jobs you have, but the longer-term security of that job and future career prospects;
- your ages – the average age of the first time buyer is currently 30, said the Telegraph newspaper on the 27th of January 2018;
- the location and value of the property you intend to buy; and, of course
- the amount of the deposit you have to put down – the larger the sum, the greater your commitment in the purchase of the property.
Raising the deposit
So, how can you raise more than at least £10,000 as first time buyer mortgage deposit?
- saving for your first home comes at one of the least convenient times in your life;
- you – and your partner – are likely to be just starting out on your careers and have the salaries to match;
- you may already be paying a large proportion of your salary in rent; and
- kitting out a rental home to any level of comfort is probably taking care of the rest of your earnings – savings are extremely difficult to make;
- the government runs a number of Help to Buy schemes in support of first time buyers trying to gain their first foothold on the housing ladder;
- with a Help to Buy ISA, for example, the government adds an extra £50 for every £200 you save each month (up to a maximum of £3,000);
- a Shared Ownership scheme is available to help those first time buyers purchasing a share in a property; and
- an Equity Loan scheme, which grants an interest free loan (for up to five years) on 20% of the cost of your first home – with this help to buy deposit, therefore, you might be able to afford a 25% deposit by contributing just a further 5%.
When a member of your family makes a present of the money for the whole or part of your deposit, that is known as a gifted deposit – and these may also be gifted by friends (although the latter might be viewed less favourably by lenders).
Anyone gifting a deposit in this way must understand that it in no way results in their gaining any financial interest in the property and that they have no right to recover any such gift. Independent legal advice therefore needs to be sought by anyone considering gifting a deposit. If you want to take a legal charge on the property, to ensure that your loan is repaid when the property is sold, you again need to take legal advice.
Mortgage lenders offer the same product to those who offer a gifted deposit from a family member – although many are circumspect about gifts from friends or other third parties.
The individual or individuals gifting the deposit must complete a letter to that effect – or sign a form provided by the mortgage lender – for confirmation of the source of the funds.
Gifted deposits may be combined with the first time buyer’s own funds or those made available under the government’s Help to Buy scheme.
Help from the Bank of Mum and Dad
According to Metro newspaper on the 29th of May 2018, 27% of all home buyers in the UK received financial help by way of gifts from family or friends – a percentage which has increased from the 25% of all home purchases the previous year.
Currently, such help – from parents, siblings, aunts and uncles, grandparents, landlords and even non-relatives such as friends, or all sources combined – amounts to a generous average contribution of some £18,000 towards the purchase of a first home says the article.
Currently, there are no immediate tax implications on parents who gift money. However, a death of one of the parents within seven years of giving a gift (over £3,000) may be subject to Inheritance Tax.
An alternative to gifting the money is a loan – on which the parent charges less than the market rate of interest in order to help you out. It makes sense for both parties if you ask your solicitor to draft a simple promissory note formalising any such arrangement.
Alternatively, ask your solicitor to draw up a deed of trust by which you (as the first time buyer) agrees to repay the loan you have made when the property is sold.
Parents can also help a child buy their own home without directly lending them money by acting as guarantor on their mortgage.
As a guarantor, the parent would have to agree to cover any monthly mortgage payments linked to your home if you were unable to do so.
This means the parents’ income is taken into account when agreeing a mortgage deal, potentially allowing you to borrow more.
Inheritances and trust funds
Some first time buyers may also be fortunate enough to have assembled the necessary deposit from an inheritance or as beneficiaries of a trust fund.
Borrowing your deposit
The purchase of a first home already involves your taking on a massive debt – by way of a mortgage – so you do not really want to take on further commitment by borrowing your deposit. Sometimes, though, you may have very options.
Potentially borrowing an unsecured loan to get the deposit is a consideration. If both the mortgage and loan are affordable, then some first time buyer mortgage lenders allow this. We do not typically recommend this but if that is the only option available we can look at this.
Although FTB mortgages – and the FTB mortgage deposit you will require – remain a major challenge for those hoping to get their first foot on the housing ladder, there remain a number of ways in which the necessary funds may be raised.
Once you are ready to proceed with your first time buyer mortgage, we will be able to find your ideal, affordable mortgage, so you can make those first steps on the property ladder.