Deposits: How Much is Enough?
Okay, So you've made your goal for 2018. This is the year you're going to get on the property ladder. You've been renting for a while or you've been living at home and have been stacking as much as you can. Enough is enough you're tired of having to share the bathroom with your 5 siblings. This is finally the right time. You've got a steady job and you're ready to get out there. But are your savings enough?
Now depending where you want to live, Deposits can range from £20,000 - £100,000. But i'll assume that if you're reading this you're a first time buyer and don't have hundreds of thousands to spend. (Don't worry, I definitely didn't have that either....)
Depending on how much you know about property, you may know that in the past it was normal for banks prior to the crash, to offer buyers 100% mortgages, which essentially meant that the bank would cover the whole loan of your property, covering your deposit too. The result of this were many people ending up in negative equity (where the value of your property decreases from the purchase price). To counter this approach, the banks started asking buyers to invest in the property themselves to stop buyers falling into negative equity and to assess their affordability. Banks are always out to save themselves and their money first! Therefore by making buyers invest they don't lose all of their investment, and still make money on the interest you've paid.. (cheeky right?)
So How Much Deposit do you actually need?
If you are looking at a straight forward, full ownership purchase, as your first step on the ladder. 10% is the minimum amount. Why 10%, I'm sure you've seen banks at some point offer 5-9% Deposits (not so many, but they exist). Well 10% is actually where the interest rates (the monthly costs of taking out a loan) actually start to level out. A 5% Deposit carries a steep interest rate (Currently between 3-5% overall for comparison), a 25% deposit carries a much smaller rate (Between 1-3% overall for comparison). On a monthly basis, that's the difference of about £3-400 per month.
Now this may be quite obvious to some, but as a former estate agent, you would be surprised at how this isn't really common knowledge. Most of the focus for First time buyers is getting the initial deposit together. Speed can be very important in doing so, as the quicker you can get a deposit together, the less likely you have to worry about prices suddenly increasing and phasing you out of a price range. (It happened to me...)
But how does this apply to shared ownership for example? Well actually it's pretty much the same as you are still taking out a mortgage (albeit a smaller mortgage therefore the 10% might equal £15,000 instead of £30,000). But there are other risks and costs associated in shared ownership, that I will cover in a subsequent post.
Okay, so bearing in mind that your deposit should be 10% or more of the purchase price of the property that you have in mind (or in most cases in the price bracket that you can afford), Then you should be able to plan a bit more clearly about the other costs that you will also need to take in to account. We will look at these in a bit more detail. but to summarise
- Your deposit should be a minimum of 10% of the cost of the property purchase price
- This amount does not account for any of the other costs associated with getting a property
- The prices, depending on the market can change quite quickly, so 10% could become 12% for the same property in the space of a few months.
Let me know your thoughts...