Coming up with the cash to make a 20 percent down payment (typically between 0 and 20 percent of the purchase price on a home is becoming increasingly impractical. To get a good mortgage, you often need a dauntingly big deposit. The average first-time buyer puts down a 20% deposit on their first home, which could mean finding a daunting £20,000 or more - Most lenders usually like to see a 20% down payment before they'll give you a loan. But it's not a requirement. There are also a bunch of low down payment loans available.
Smaller down payments also make it tougher to compete in a hot real estate market filled with all-cash buyers who often win out in bidding wars.
As you save money for your down payment, avoid the temptation to invest in the volatile stock market with money you hope to use in the next year or two.
Get your documentation in order
If you’re close to putting an offer on a home, begin to collect documents that you’ll need to verify your financials on the mortgage application: payslips, employment letter or tier-I/II, bank statements and, if you have freelance or self-employment income, copies of your last two tax returns.
Mortgage lenders charge fees that aren’t necessarily reflected in the interest rate. There can be fees for appraising the home, checking your credit, and preparing documentation.
• Bank of mum and dad:
Parents might help with cash gifts, informal loans, or more formal arrangements with the mortgage lender to provide part of the deposit or act as guarantor (in which case, they become liable for paying the mortgage if you can’t).
• Buy with friends or family:
You might be able to club together to buy a home jointly, but think through how this will work later on if one of you wants to sell their share.
• Shared ownership:
If you currently rent a council or housing association property and have a household income of less than £80,000 (outside London) or £90,000 (inside London), you might be eligible to buy part of a home and rent the rest. This reduces the size of the mortgage and deposit you need, so you pay less for the mortgage but also have to pay some rent.
• Help to Buy and other shared equity schemes:
These help you buy a new-build home. You typically need a deposit of only 5% and the government or the developer lends you the rest of the deposit – up to a further 20%. Under Help to Buy this loan is free for the first five years but you need to plan how you will pay the yearly fee that kicks in from Year 6 onwards. It is only available for new-build homes.
• Help to Buy Mortgage Guarantee scheme:
Available now to help you buy a new-build or older home, you put down a deposit of between 5% and 20%
Where to save your Down Payment or Closing Costs
Almost all the banks in the UK offer peanuts on your savings. If you do not come from a very wealthy family to buy a home with 100% cash, you would obviously need a payment plan of some sort, irrespective of your home finance option.
Below are valid options....
1. Stocks & Bonds (incl UK Government Gilts)
2. Forex Brokerage Account
3. A DCANS Option (Not yet active)
Coming soon, after BoE regulatory processes.
** Savings Warning **
Do not be deceived into locking your savings with some shady share sale company or a deposit-taking company even as they may offer you several percentages more than the safer ones we have outlined above.
What next after saving for a home?
You can start the home buying process as outlined here.
Signs you aren't ready to buy a home
• You don't have enough money saved
Having a down payment of 10-20 percent of your potential home's purchase price in the bank is an impressive achievement, and you should be proud of yourself. But having saved that much doesn't necessarily mean you're set.
Affording a home means you have much more cash on hand than what you'll need up front. In fact, a down payment is just one of six necessary factors you need to budget for. The other five are closing costs, moving expenses, repairs and maintenance, the first few months' mortgage payments and your emergency fund. Closing costs can run you 2-5% of the total cost of the home, for example, while the cost of repairs and maintenance can represent 10-20% of the price of the home each year.
They represent a sense of how much you'll need saved up to be able to really afford a place of your own month after month. If you can't afford to handle all of these one-time and recurring expenses, you can't yet afford a home.