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Crossing the mortgage deposit gap

5-10% deposit: What are your mortgage options?

Wednesday 16 September, 2020

Vishal Gulrajani, Financial adviser and mortgage broker in Cheshunt reviews the options available to first time buyers with small deposits of 5% or 10%.

If you are a first time buyer looking to take advantage of the stamp duty holiday and purchase your first home call our qualified mortgage brokers on 01707 872000.

Mortgages are getting harder to obtain 

I’m sure most of you are aware mortgages are getting increasingly difficult to obtain, especially for first time buyers with a small deposit. In my previous article Is it a good time to move? I reviewed the position of the self-employed and the impact of taking the government bounce back loans. Today I wanted to focus on the struggle for first time buyers and people with low deposits. 

How can first-time buyers secure a mortgage?

One of the challenges first time buyers face is that products allowing a 5% deposit don’t really exist and 10% deposits are extremely limited. The problem most first time buyers have is that they have genuinely worked tirelessly over the last couple of years to save a deposit of between 5% and 10% of their property price. Consequently, to then be notified that you can’t obtain a mortgage because your deposit is too small can be infuriating. However, there are still some alternatives which may help you purchase your dream home.

First time buyers can put down a deposit through the Help to Buy scheme

The first thing to remember is although a 5% deposit on a normal mortgage is not possible you can still put down a 5% deposit through the help to buy scheme. This is where you get a government loan of either 20% or 40% (depending if you are buying inside or outside London) and the rest is made up from a mortgage. As a result, even with as little as 5% you can still purchase a new build property even with the current strict mortgage conditions. 

In fact, sometimes it works out you can purchase a more expensive property through the help to buy scheme than a normal mortgage due to the government equity loan part. However please note the maximum property purchase price is currently capped at £600,000 if purchasing through the help to buy scheme and this scheme is only applicable to new builds. 

Shared ownerships are another option if you have a small deposit

Another option that is available for people with small deposits is the shared ownership scheme, which is another government backed scheme. This allows individuals to still put as little as 5% deposit down on the share of the property they are purchasing. Individuals can purchase as little as 25% of a property under the shared ownership scheme which often means clients can purchase a property, they wouldn’t be able to afford under normal mortgage conditions. They can then increase their ownership stake as they progress through their career. 

However it is important to note that you will have to pay rent for the proportion of the property you don’t own so it is important you seek mortgage advice before trying to purchase a property, as the rental proportion acts as a credit commitment and can limit the amount of mortgage you can obtain.

Obtain a gifted deposit from friends or family

Another option is obtaining a gifted deposit from family or friends. This is one of the most popular options and is usually referred to as the ‘bank of mum and dad,’ as most gifts for clients come from their parents. Parents often plan to help their children out by giving them a lump sum to increase their deposit. This allows them to put 15% down on their property purchase. It is important to note parents may not physically have the cash available, but they may have equity in their properties which means they can re-mortgage their own home to release money for their children in order for them to purchase their dream property.

It is also important to note that certain lenders do allow stipulations with a gift e.g. if the property is sold the gift has to be paid back. As a result, it can be a loan with certain lenders as well as a gift, so we recommend you contact our mortgage broking team for mortgage advice if you are looking to go down this route. 

First time buyers can purchase a home with other friends or family

One final popular option is individuals who are buying with their brother, sister or friend. This allows them to put down a bigger deposit and purchase a larger property as you base the mortgage amount off two incomes. Consequently, individuals can get on the property ladder faster and in areas where they otherwise might not have been able to afford to purchase. However, it is important to do this with someone you trust. Also note that the ownership of this type of property purchase is usually done on a tenancy in common basis which means a selected percentage is assigned to each individual. Again, it is important to seek mortgage advice for this type of purchase so each individual can understand the risks involved and how tenancy in common works. 

Vishal Gulrajani Financial Planner in North London, Cheshunt and Goff’s Oak said: 

‘Overall the mortgage market is a lot stricter than it was pre lockdown with the amount of uncertainty that still exists. However, as you can see from the purchasing options above if you are a first time buyer there are still possibilities to purchase a property with a low deposit. If you have been struggling to purchase your first home because of a low deposit, then please call our qualified Thomas Oliver mortgage advisors to discuss alternative opportunities. You may be surprised as there could still be viable mortgage solutions available to you.  Remember that at Thomas Oliver we make sure each recommendation is personalised and unique to you. We will review your financial circumstances and then we can recommend the best mortgage option for you. If you are a first time buyer all the different purchasing options can be confusing but we can talk you through these so you understand each one. We can also review all the mortgage products currently available to you, so you find the right mortgage product for you. We work with clients in Hertfordshire, Bedfordshire, North London, Central London and Essex. Call our mortgage brokers now for a free initial mortgage consultation on 01707 872000.’

In Summary

If you want to purchase your first home and understand your mortgage options, call our Thomas Oliver mortgage brokers for personalised mortgage advice.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.

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