When a first time buyer buys their first home, they borrow a large sum of money. This loan, to buy the property with is called a mortgage. They usually also put a lump sum of money towards the purchase too. This lump sum is called a deposit.
A large advantage of having a deposit to put down is that when you apply for your first mortgage, the lender will see that you can be responsible and conservative with money, particularly if you have saved up over a period of time. This saving regime stands you in good stead when the prospective lender is considering whether you will be a good person to lend to. You may well have to supplement your savings/earnings with money given to you by parents to help you step onto the first rung of the property ladder.
Another advantage of having a significant deposit is that you instantly have equity in the property. In this case there is a buffer in case the property value drops. The value of the property would have to drop the whole amount of the deposit before you would start to be in ‘negative equity'. This can be a problem if you have to or need to sell your property.
Mortgage lenders generally charge less to those borrowers who are taking out a mortgage in conjunction with a significant deposit.
But you don't always need a deposit….
One way of not needing to scrimp and save, work, borrow or sell to get together a deposit is by having one donated to you as mentioned above. A gifted deposit is becoming more and more popular. Parents quite often have useful amounts of equity in their own property and may well have paid off most of their mortgage. These parents are in a good position to help their children buy a first home.
About half of all first home buyers are getting significant help from their parents. However, there are tax implications for receivers of financial gifts as, if the ‘donors' die within 7 years of making the gift, there may be a tax liability on that amount.
Property developers are also now offering gifted deposits on their houses and flats in order to help first time buyers finance their first home. Typically a sum of money is still payable up front but the overall amount for the deposit will normally be provided by the property seller in order to help sell it.
These days, the right borrower can borrow up to 130% of the value of the property. Typically this sort of mortgage can only be secured by someone in a high-paying profession who the lender can see will have a rapid and significant rise in income in the forthcoming years. The benefits of this are that no deposit needs to be found and the costs of the purchase and of furniture and furnishings can all be covered by the large mortgage. These sorts of mortgages are not right for everyone and the lenders are careful about who they lend to in this way. Lenders may also lend more widely, say, 105% of the property value to help with moving expenses.
Another zero-deposit option is shared ownership. Shared ownership is designed primarily for key workers and is offered through the government's New Build HomeBuy scheme.
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