What is a Deposit, and How Much is it Usually?
A deposit for a mortgage on a property is a sum of money that you have to pay upfront towards the property. The amount that you are expected to pay for a deposit depends upon the price of the property and what your lender requires. Most lenders typically will require a minimum deposit of 5%-10% of the price of the property.
Why Do I Have to Pay a Deposit?
Your lender requires you to pay a deposit to reduce their financial risk, prove that you can save money consistently over a period of time, and to provide a safety net for if the value of the property drops. So if you stop making your monthly mortgage payments and the bank have to repossess the property, the deposit that you originally paid will protect them if the property value falls below what you owe.
Can I Pay a Larger Deposit Than is Required?
Yes, you can. This will go in your favour too, as the more you pay on your deposit, for example if you decide to pay a 10% to 20% deposit, then the less you will have to pay monthly. This is because the larger the deposit paid, the lower your loan-to-value (LTV) ratio will be, which also means better interest rates. The more you pay on your deposit for a property, as well means, the more of your mortgage you have originally paid off to begin with making the monthly mortgage payments lower. A bigger deposit paid also helps to avoid expensive risk fees such as lenders mortgage insurance.
Do I Get My Deposit Back?
No. Unlike a rental property, a deposit for the mortgage to purchase a property is NOT given back. This is because the money is paid directly to the seller of the property for you to buy the property, meaning it is part of the overall price that you are required to pay for the property.
Can I Buy a Property Outright, Without the need for a Deposit?
Yes you can. These are called 100 mortgages where the property is paid all in one go. These mortgages do not require a deposit, but do however require a guarantor, and are extremely rare to be approved, because they pose more financial risk to the lenders. (See our article on 100 mortgages for more information).
Does a Buy-To-Let Require a Deposit?
Yes, a buy-to-let mortgage does require a deposit. Usually a buy-to-let demands a higher deposit than a normal mortgage, with usually requiring a higher down payment of approximately 25% of the property sale value.
Is a Deposit the only Up Front cost I Have to Pay for a Mortgage?
No, unfortunately, there are other up front costs to be paid in the process of applying and getting a mortgage. There are: Legal and solicitor fees, surveys and valuation fees, moving and furnishing and repair fees. To find out more about these please read our article on mortgages for first time buyers and what to expect.
Once I Have Paid my Deposit, is the Property mine?
Unfortunately, not quite. A deposit is the first step of the mortgage process for securing a property that you are aiming to eventually own. However, the property is not legally yours until you have fully paid off the mortgage. Once the mortgage has been finalised for monthly payments, the property is your responsibility to pay for, as your name will be on all the legal mortgage documents. Again, for more information on this process, please read our article on Mortgages and what to expect for first time buyers.
