Buying your first home can seem as daunting as it is exciting – after all, it’s the most expensive purchase you’ll ever make. One question we often hear from excited house hunters is ‘how much of a deposit should a first time buyer have?’.
How Does A Deposit Work?
A good illustration is to imagine you wanted to buy a home for a nice round number – £100,000. You save, for example, 10% of the value of the house, which is £10,000. This means you now need to borrow 90% of the value of the house, or £90,000, from a lender (usually a bank).
While 95% mortgages (i.e. one where you save 5% of the deposit, and the bank lends you the rest) are a handy option for first time buyers who want to get on the ladder without saving for a long time, the higher your deposit, the cheaper your mortgage rate tends to be.
When Do I Pay The Deposit?
A deposit is paid just before you exchange contracts on the house.
This is towards the end of the conveyancing process, after you have made an offer and had any legal work such as surveys done, and usually a few weeks before you complete.
You pay the money to your solicitor, making sure it is cleared into their client account at least one day before you’re due to exchange contracts. Solicitors’ client accounts are protected by a body called The Law Society, so you can be sure your deposit is in safe hands!
Deposits are usually paid by bank transfer – your bank may have a limit on how much you can send via transfer per day, so make sure you check this beforehand.
Then, when contacts are exchanged, your solicitor will send this money to the seller. The seller usually takes a 10% deposit, so even if you are putting a 20% deposit down on the house, only 10% would be taken at this point – with the other 10% paid alongside the money from your mortgage lender when you complete the purchase. However, an exception to this would be if you are only putting a 5% deposit down on the property.
Can You Lose A Deposit?
In short – yes. Once contracts are exchanged, you are then bound by those contracts to complete the purchase of the property, so if you pulled out of the purchase after this point, you could lose your deposit. Sellers are entitled to 10% of the property value if a buyer pulls out, so if you have only paid 5% of the value of the home, you could be liable to pay the remaining 5% to the seller.
Reasons why buyers pull out of the purchase vary, from changing circumstances to issues with the house coming to light after exchange. This is why it’s important to have comprehensive surveys done and ensure you’re completely happy with the purchase before going ahead with exchanging contracts.
All in all, buying a home is an exciting time for all first-time buyers.
However, being clued up about what to expect when saving for your first-time home buyer deposit means you’ll be prepared for the process - and have the keys to your brand new home without any stress!
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