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Should I save for a bigger or smaller deposit?

Posted on 15 October, 2019

I was speaking to a friend the other day and he mentioned that he was hoping to get on the property ladder by the end of next year. After speaking to him he realised he was in a position to get onto the ladder now if he put down a 5% deposit. Hence this blog post on the main differences between putting down a small or big deposit.

Why you may want to put down a smaller deposit

  • To take advantage of current house prices

The longer you save for a deposit the greater the risk that houses prices may go up. Saving a smaller deposit allows you to get on the property ladder NOW rather than in a years’ time when property prices may be even higher.

  • More capital to invest

Putting down a smaller deposit should hopefully mean that you have remaining capital that can be invested/used elsewhere.

  • Quicker Return on Investment (ROI)

Let’s say you buy a house for £200,000 and put down a 5% deposit (£10,000). If the value of your house was to increase in one year and you remortgage and take out £15,000; it means you would have recouped your initial investment of £10,000 in a years time + an additional £5,000.

  • You have good credit

Due to the additional risk associated with high LTV mortgages; lenders tend to only give 95% mortgages to those with excellent credit scores.

Why you may want to put down a bigger deposit

  • Lower Interest rates

The bigger your deposit is the lower your monthly repayments are going to be. High loan to value mortgages are riskier for mortgage lenders; therefore, lenders tend to charge higher interest rates to protect themselves in case customers fall into negative equity.

Darren Cook; a Finance Expert at Moneyfacts says “With rates at the 95% LTV rising faster than at any other tier at the moment, it is likely the gap between these two higher LTV tiers, which currently stands at 0.63%, could widen in the coming months.”

  • Less chance of negative equity

The bigger your deposit is the greater equity you have in your property. Therefore, there is less chance of you falling into negative equity in the event of property prices falling.

  • Affordability

If affordability is an issue for you. A bigger deposit can go some way into solving it. For example, if the banks will only lend you a maximum of £250,000 but you want a property costing £300,000. Putting down a big deposit may be your only option.

  • You’re getting a buy to let (BTL) mortgage

Generally, you will need at least a 25% deposit to get a BTL mortgage. Just like residential mortgages, the higher the deposit you put down the lower your interest payments will be. This is particularly important when it comes to Buy to Let mortgages as they tend to be interest only.

  • Bad credit

If you have bed credit it is likely that you will be deemed to be a higher risk to a lender, and you may not have access to a high loan to value mortgages. A larger deposit can offset the risk posed to a lender.

*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

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