Struggling to save up for a deposit to buy your first home? Why do you even need to pay a deposit?
One of the biggest complaints from first-time buyers is how difficult it is to find the deposit. The substantial amount needed is prohibitive for many would-be first-time buyers.
When you have other major outgoings like rent to pay, saving for a deposit can be almost impossible.
One of the biggest complaints from first-time buyers is how difficult it is to find the deposit. The substantial amount needed is prohibitive for many would-be first-time buyers.
When you have other major outgoings like rent to pay, saving for a deposit can be almost impossible, and there has been a massive rise in the 'Bank of Mum & Dad' stepping in to help some lucky first-time buyers get their first step on the ladder. But this option isn't available to everyone and leaves many of us in long-term rented accommodation rather than buying our first home.
Why do you even need to pay a deposit when buying a property? Before the last recession in 2008, mortgage lenders would loan you the money you needed to buy a property. They would also lend you a little more, if needed, to pay for a refurb or furniture once you have moved in. Sounds great, doesn't it - no deposit to find, and you could even get a little helping hand to make everything just right.
Some blame the 125% mortgage deals as one of the reasons that the credit crunch happened in the first place.
If a property was bought for £100,000, they could borrow up to £125,000. This would cover the cost of the solicitors and surveys with a surplus left over. They could then spend this surplus in whatever way they want to. Furnishing or refurbishing the property, paying off credit cards and loans, or spending it on a lovely relaxing holiday after the stresses of moving house. The assumption was that the property prices were still increasing, so it would be fine. The property worth £100,000 yesterday will be worth £125,000 in no time. Many of these mortgage deals were also offered as interest-only, so none of the loan was actually being paid off, just the interest.
If the lenders needed to repossess the property in the future because the homeowner stopped making payments, the property's value would have increased anyway, so their loan was safe. Banks were lending money to borrowers, and banking (get it!?) on the property price continuing to increase.
When the recession started, and property values began to reduce, many people quickly found themselves in negative equity - where the property's value was less than the outstanding mortgage amount - because they essentially started their property ownership in negative equity.
The market ceased to rise to the level that was needed to cover the amount of the mortgage. This meant that many people were either stuck with the property, unable to sell it because they couldn't pay off the outstanding mortgage, or, if they could not keep up with the payments, their homes were repossessed.
When a property is repossessed, the lenders sell it to recover as much of the outstanding loan as possible. But, because the outstanding loans were much higher than the property value, they had to write off large sums.
Hindsight is always 20:20, isn't it? But even so, looking back at this situation 15 years on, it does sound crazy to think that loans were being offered in this way.
As a result, lenders are much more risk-averse now - and perhaps that's a good thing! They're no longer willing to give a mortgage to anyone who can't put in some of their own money. You need to have some skin in the game. If the property market drops again, you risk your equity before the loan becomes compromised. If you have £20k equity in your property and the market drops by £10k, your equity is now just £10k, and the mortgage amount for you to pay back stays the same. This acts as a buffer for the loan to prevent negative equity situations for the lender.
It can be frustrating to look back at how people could purchase a property 15 years ago without any deposit, and you might be struggling to save up enough just to get on the housing ladder. But there are valid reasons to pay a deposit, and it's better for everyone in the long run. Saving for a deposit, when you also have other living expenses to pay, such as rent, can be very challenging, but it'll be all the sweeter when you eventually get the keys to your first home, knowing what you've achieved.
If you're looking for your first home, let us know. We are here to help you find the property of your dreams, so don't spend all your time scouring the property websites; register your information with us, and we can let you know when a suitable property comes on the market. Get in touch today.