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Buying your first home with a small deposit

Lisa Bennett
March 5, 2022

Buying a property with a small deposit is challenging as house prices continue to increase. It can be tough to purchase a home with a low deposit, but you may be able to accomplish it with patience and careful planning.

Looking to purchase your first home but worried about the money you’ll need as a down payment? Possibly, you don’t have considerable money set up, or perhaps you do, but you’re hesitant to spend it. There’s no reason to be concerned about this now. This guide will show you how to discover the most terrific deal if you just have a small deposit.

Start Saving

At times, saving for a house may seem like a pipe dream, but it is pretty achievable. If you consider purchasing your first house, there are several actions to make your dream home a reality.

It can be challenging to meet if you’re renting while saving for your deposit. Given the large number of young individuals who find themselves in this situation, it is not surprising.

If you’re fortunate to have some savings or have received assistance from family or friends, you can utilise these funds to put towards a down payment on your first house. However, it may not be easy.

Even if you’re saving £200 per month, saving for a deposit is a significant time commitment, and it may be enough to get you on the housing ladder.

What do you need to do to purchase a property with a small deposit?

As a first-time buyer, you will likely be looking at properties around the low to mid-tens of thousands of pounds. Take your time looking for your first home and think about how much you can realistically afford.

You must ensure that you have the financial means to cover all of the fees associated with purchasing a home, including the deposit and any service charges. The prospect of becoming a first-time buyer can be intimidating, but with proper planning and budgeting, it is definitely doable.

How much deposit do I need?

The size of your deposit will ultimately decide how you can borrow for a mortgage. The lesser your down payment, the greater your mortgage will be, resulting in higher monthly payments and more interest paid over the loan’s term.

The cost of the property is the most crucial aspect in determining how much of a deposit you will require. As previously stated, if you don’t have a lot of money saved up, you could only buy a lower-priced house.

It is dependent on where you are purchasing your home and whether or not it is your first home as to what percentage of the total amount of the property you should put down as a down payment. A deposit of at least £7,000 would be required if you purchased a house for £140,000, for example, usually 5%.

However, if you can put up a larger deposit, you will minimise the amount of money you pay towards your mortgage.

Understanding Mortgage Loans

A mortgage is a loan that is secured by real estate. It takes a specified amount of time to pay off the loan plus interest, usually 25 years, although it can be longer or shorter. The capital – the amount of money you borrowed – must be repaid at the end of your mortgage term unless you sell your home and your new lender agrees to assume responsibility for the mortgage.

The interest you pay is determined by how much, duration, and rate you borrowed it. Your interest rate will be determined by your financial history as well as your ability to obtain a fixed-rate or variable-rate deal.

In addition, mortgage lenders may require you to get property insurance and life insurance (if other people are relying on your earnings). This insurance provides protection for your family if something occurs to you or if your home is damaged due to a natural disaster.

Find out how much you can borrow

Determine how much you are eligible to borrow. For lenders to determine how much you can pay, they will consider a variety of factors, including your income and outgoings, as well as their own affordability standards.

Not to mention that all mortgages are subject to a customary arranging cost. These are often in the region of £900 or more, so remember to include these in your calculations as well.

As house prices continue to rise, the government has implemented an equity loan.

This implies that if you have saved a five per cent down payment, the government will lend you up to 15% value of your home if you qualify. After that, you’ll need to secure a 75 per cent mortgage from a bank or building society to cover the remaining balance.

First-time buyer mortgage guarantee

If you’re a first-time buyer, you might be startled by how much of your monthly income is taken up by mortgage payments and other monthly expenses. The good news is that you can use the First-time buyer mortgage guarantee offered by the government to assist you in your first property with a reduced down payment.

The First-time buyer mortgage guarantee scheme can assist you in purchasing your first property with a lesser deposit than would otherwise be required.

If you only have a tiny deposit, this does not rule out the possibility of getting on the property.

Numerous mortgage alternatives are available to first-time buyers, ranging from self-employed individuals to those with a low credit history.

You might be eligible for a mortgage, for example, if you’re a self-employed first-time buyer who has struggled to make your business viable during its early years of operation. The same goes if you have poor credit due to past due credit card bills or a high-interest loan that you failed to pay back some years ago, among other reasons.

Get professional advice

The first step is to have many mortgage options available to you and whether or not they are within your financial reach. If you’re unsure which option is best for you, seek professional guidance from an independent mortgage broker.

You should look for a broker who is not attached to any particular lender and is entirely independent. Independent mortgage brokers will be able to search the whole mortgage market to get you the most competitive rate.

You should also ensure that they have access to the whole mortgage market; this means that they can look for and compare every single mortgage package available, rather than simply those supplied by a particular bank or building society.

When you meet with the broker, they should run a credit check on you and discuss your borrowing capacity, how much money you have saved for a down payment and how much you can afford in monthly payments. Following the collection of all of your information, they will recommend a mortgage product that is appropriate for you.

Explore your options

The good news is that you can still purchase a home even if you have a smaller down payment. There are several government-sponsored programmes available to assist first-time buyers with small deposits. However, just because these options are accessible does not imply that they are the best appropriate for your particular situation. The goal is to thoroughly investigate your options to make the best selection possible for you.

Please check our moving house checklist.