Should I buy a house with a 5% deposit or save more for a cheaper mortgage?
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I’VE just spoken to my bank about getting a mortgage for my first home and it has agreed in principle to lend me up to £160,000.
The house that really I want to buy is on the market for £142,000 and I have £7,500 to put down as my deposit, which is just over 5 per cent.
The mortgage rate that my bank is offering me is quite a bit higher than the rates it says I could get with a 10 per cent deposit.
Is it better for me to hold off buying until I can save up a larger down payment or take the plunge now?
What are the risks of buying now and what are the risks of waiting?
Anon
Leah Milner replies: Getting your hands on the best mortgage deal is a minefield.
In fact the watchdog recently found that only a third of us manage to navigate all the different options to find the best home loan offer.
Everyone else is probably paying too much.
Do you have a money problem that needs solving? Email Leah at Money@The-Sun.co.uk
First of all, it is a bad idea to just take what your bank is offering.
The chances are you will be paying way over the odds.
You should definitely check on comparison sites and consider taking advice from an independent mortgage broker before you go any further.
How to find the cheapest mortgage deals
CHOOSING a home loan is one of the most important financial decisions of your life and getting it wrong could cost you thousands of pounds a year.
- Never assume that your bank will offer you the best deal on the market – it rarely will be.
- Always check on comparison websites like Moneyfacts.co.uk or Moneysupermarket.com to see if you can find something cheaper.
- Use a mortgage calculator like to see whether a mortgage with a low rate and high fee or one with a higher rate and lower fee is going to be better value. It all depends on the amount you are borrowing.
- Speak to an independent mortgage broker as there are plenty who won’t charge you a fee because they earn commission from the lender. See Unbiased.co.uk to find a mortgage adviser near you.
- Check back with a comparison website to see if any lower cost deals have appeared in the meantime. Some lenders only offer deals directly to customers, but keep in mind the fact that the cheapest home loans normally require you to have a near-perfect credit history.
Should you buy with a small deposit or keep saving?
The question of whether to wait and keep saving is much more complicated and personal.
It partly depends on how much you are in love with the house that you have just found.
From a purely financial point of view it’s not an easy decision either.
Your Mortgage Decisions director Dominik Lipnicki said: “As you have rightly pointed out, the larger the deposit, the better the interest rate as less risk for the lender.
“That’s because, if you were to stop making your payments and the bank had to repossess your home, then it might not be worth as much as they originally lent you if house prices have fallen.
“We have had record low mortgage rates for almost 10 years now.
“This is great news for anyone buying a property now but the question is what will happen to rates next?
“Few people believe that rates will drop further and many experts are now suggesting that they could be going up.
“Whether you will save money by waiting until you can save a larger deposit depends on how long you estimate it will take you.
“If mortgage rates and house prices rise in the meantime it could wipe out any savings you might make.”
How to get help buying a house
THERE are several government schemes available to help you get on the housing ladder.
- Help to Buy loan: This scheme is for those who have a 5 per cent deposit, and is only available on new-build properties that are worth less than £600,000. The government lends you up to 20 per cent of the property value (interest-free for the first five years) which gives you access to cheaper mortgages. You will need to pay this back at the end of the mortgage or when you sell.
- Starter Homes: First-time buyers under the age of 40 can access this new scheme. You’ll get a 20 per cent discount on the market value of the property (new-build only) but you cannot sell or let the property for five years after you buy it.
- Shared ownership: This scheme is available to non-homeowners who earn £80,000 a year or less (£90,000 in London). People can buy a share of a home from a housing association and continue to rent the remainder. Buyers will need a ten per cent deposit as well as money to cover stamp duty and other fees. You’ll also need to find a mortgage lender that is willing to lend on shared ownership properties.
What are the cheapest deals with a 5 per cent deposit?
Here are the cheapest deals currently on offer for borrowers with a 5 per cent deposit and for those who have a bigger 10 per cent sum to put down.
If you have a 5 per cent deposit you will need a 95 per cent loan-to-value (LTV) mortgage, which describes the amount you borrow relative to the value of the house.
Save up a 10 per cent deposit you’ll only need a 90 per cent LTV mortgage.
Don’t forget to compare the true cost including fees using a
Here are the best fixed rates with a 5 per cent deposit?
- Barclays 2.55 per cent three-year fixed with no fee –
Based on the amount you need to borrow, which is £134,500, over a repayment term of 25 years, you would pay £607 a month for three years. You’ll then move onto a tracker of 2.49 per cent plus the Bank of England base rate, which is currently 0.5 per cent, but expected to rise. - Nottingham Building Society 2.89 per cent two-year fixed with £999 fee –
With this deal you would pay £635 a month for two years including the cost of the fees added to your loan. After that you will be put on a variable rate of 5.49 per cent or £825 a month so make sure you switch then. - Sainsbury’s Bank 3.59 per cent five-year fixed with no fee and £500 cashback –
Lock into this rate for five years and you will pay £680 a month for the first five years and then 4.24 per cent or £680 a month from then onwards.
Should you fix your mortgage for five years?
THE year 2023 may sound like a long way off, but with predictions of interest rates rising is it worth fixing your mortgage costs until then? We weigh up the pros and cons of five-year fixed rates:
- PRO Interest rates are still incredibly cheap by historic standards so locking in could keep your mortgage payments lower for longer.
- CON A lot can happen in five years and if your circumstances change and you need to move house it can sometimes be tricky to take your mortgage with you. This could mean you have to pay a hefty Early Repayment Charge (ERC) to get out of the deal.
- PRO If you choose a longer term deal there will be more time before you to pay the fees for a remortgage, which can be more than £1,000.
- CON As you pay back your home loan your loan-to-value will reduce giving you access to a wider range of better value deals. Fixing for five years means you will have to wait longer to get those deals, but then again with rates expected to rise that might not save you money anyway.
What are the cheapest deals with a 10 per cent deposit?
If you do continue saving to get a 10 per cent deposit or £14,200 you will have access to much cheaper rates, than those for borrowers with 5 per cent to put down.
But don’t forget that by then rates may well have risen across the board.
You will also be borrowing less (£127,800 instead of £134,500) so your monthly repayments will be lower anyway.
Here are the cheapest rates you can currently get at 90 per cent LTV:
- Yorkshire Building Society 1.72 per cent two-year fixed rate with £495 fee –
With this deal you would pay a lot less than the equivalent deal above for those with smaller deposits. Your monthly payments would be just £526 based on your lower loan size. After two years the rate jumps to 4.99 per cent unless you switch. - Barclays 2.34 per cent five-year fixed with a £999 fee –
On this mortgage you would pay £568 a month, but you would have the added certainty of knowing that your payments won’t rise for five years. After this you will move onto a variable rate of 3.99 per cent.
So now that you have the maths you have some more thinking to do.
Waiting and continuing to save means you will get the relatively lower rates at 90 per cent LTV, but if house prices in your area and mortgage costs have risen by that point you might not make a real saving.
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