In the UK, you can put anything from a 5 percent deposit to a 20 percent deposit when you are purchasing a property. If you are using a government scheme such as the Help to Buy scheme, you only need to pay 5 percent of the total value of the property as the deposit. If you are not taking advantage of any such scheme, most mortgage providers will ask for a down payment of around 20 percent, or higher. Which brings us to the important question at hand; what are the pros and cons of a large deposit while buying a house in the UK?
Lower monthly payment:
If you ask an established estate agent in Watford, he or she will tell you that it is better to pay a higher deposit, despite the financial burden, because of the higher equity and lower monthly repayments. If you put a higher down payment when you purchase a property, your mortgage amount automatically goes down. If your deposit is 20 percent of the total value of the property, then you will probably take out a mortgage for the remaining 80 percent. However, if your deposit is 35 percent of the total value, then you will only take out a mortgage for the remaining 65 percent. As the mortgage value goes down, so does the monthly payment. The higher your deposit amount, the lower your monthly mortgage repayments!
Higher equity in the property:
If you pay only 5 percent of the value of the property as the deposit, you essentially own just 5 percent of the property. The remaining 95 percent is actually the property of the bank until the mortgage payments are cleared. And, the higher the mortgage, the longer the mortgage term. Plus, a large portion of the mortgage repayment goes towards interest, not just principal. The more you are able to put down as the deposit, the higher the equity you own in the property. And, by paying a higher deposit amount, your mortgage term reduces which gives you higher equity in the property a whole lot sooner!
Lower mortgage rate:
As a rule of thumb, the higher your deposit amount, the lower the mortgage rates and interest rates. Alternatively, the lower the deposit amount, the higher the rate of interest. Basically, lenders will use the Loan To Value ratio (LTV ratio) to assess their risk. If the LTV ratio is high, that means your loan has a higher risk so lenders will charge a higher rate of interest to mitigate their risk. Similarly, if your LTV ratio is low, then your loan risk is low which is why lenders will be willing to charge lower rates of interest as they probably do not have to worry about your inability to repay the loan.
Manageable monthly payments:
When you are paying a large down payment, the mortgage value automatically goes down. As the mortgage value is lower and the interest rates are reasonable, the monthly mortgage repayments are also manageable. You probably will not have to struggle to pay your monthly mortgage repayments as the amount will be lower and reasonable. With that being said, it is important to figure out your finances before you even start looking at potential properties to make the process of repayment easier and more manageable.
Longer saving time:
Of course, it takes a long time to save up for a hefty down payment. Most estate agents and financial experts recommend saying for a down payment at least 6 to 12 months before you even start looking at property. So, by opting for a lower deposit you will not have to worry about saving too much money. Saving for a 20 percent deposit could mean that you have to save for a year or two before you can even start looking at properties! On the other hand, a 5 percent deposit could probably be saved in a few months.
Reduced financial flexibility:
Saving for a large down payment is no easy task. The money that you take months, or even years, to save is all put into your new investment. This reduces your financial flexibility, especially in case of emergencies or retirement. For instance, putting large sums of money aside every month to use as the down payment for a house could mean that you are now unable to put aside any money to pay your car loans or maybe save some money for a rainy day.