One of the biggest myths in our industry is that deposits for contractor mortgages are greater than normal. Yes, you are at an advantage if you can ‘put more down’. But you’re no more obliged to than permanent workers are.
In this article, I’ll clarify:
- Why 100% mortgages have all but disappeared;
- The minimum contractor mortgage deposit required;
- Why the more you put down, the better off you’ll be in the long run.
Ready? Here we go.
What is (was?) a 100% Mortgage?
Before the credit crunch, you could borrow the full value of the home you wanted to buy from any number of mortgage lenders.
If you saw a house on the market for £250k, but didn’t have anything set aside for a deposit, no matter. Provided you met the lender’s affordability calculation, you could borrow the full amount.
What you have to remember (or realise, depending upon your age), is that the market was different in the run up to 2007:
- House prices were rising on (what seemed like) a never-ending upward whirlwind;
- Homes were often sold before they even went up in the Estate Agent’s window;
- Property investment was ‘as safe houses’;
- Lenders didn’t have to worry about negative equity.
If you defaulted on your mortgage repayments, so what? The bank could repossess your home, yet still make a tidy profit when they put it back on the market. There was little to no risk on their part.
How different the market is today…
Negative Equity – The Probability Factor
…as you can imagine, once house prices began to slump in global recession, lenders’ attitudes changed. It was almost overnight, as if someone flicked a switch.
100% mortgages disappeared. In fact, you were lucky if you could find a mortgage with a deposit of less than 20% on the High Street.
Why so cagy? Well, negative equity became a real possibility. Nay, probability.
House prices were plummeting. Not quite as fast (or as much) as they’d risen. But enough to make the banks and building societies nervous.
In theory, if you only had a 5% deposit, by the time your sale completed, the property could already be in negative equity. No more ‘safe bet’ for the lenders. A very real conundrum for the home buyer.
Then with Responsible Lending, lending criteria became as watertight as deposits were steep.
The Minimum Contractor Mortgage Deposit Required
You may think that banks were only thinking of themselves by increasing their deposits. But in hindsight, they also prevented would-be borrowers from becoming mortgage prisoners. That is, homeowners who couldn’t move because their mortgage balance was greater than the value of their home.
You’ll be pleased to know, lenders have moved on from their knee-jerk reactions to the crises. Albeit with the Government* and FCA accepting the gauntlet and leading the way.
Today, to qualify for the minimum security contractor mortgage, a deposit of 5% is all you need. The lender, therefore, stumps up the other 95% of the buying price.
So, say if your desired property was on the market for £280,000. You’d need to save at least £7,500 for the deposit and borrow £266,000 from your mortgage lender.
Help to Buy (Equity Loan and Mortgage Guarantee)
*The Government, as alluded, blazed the trail back to 5% deposit mortgages for contractors. The Help to Buy scheme was introduced to give everyone a chance of getting onto the property ladder.
The range of Help-to-Buy mortgage products offers a surprising degree of choice. Catering for deposits between 5%-20%, there is a product to suit most purse-strings.
That said, there are more cost-effective ways for contractors to buy their home. The larger the deposit, the lower the risk you are in a lender’s eyes. More often than not, the accompanying interest rates are lower the more you have to put down, too.
The hidden costs of buying a home
When you’re buying a home, there are all manner of costs you may not have budgeted for. Especially if you’re a first time buyer.
Depending upon the value of the home you’re buying, you must build Stamp Duty into your budget. This starts at 1% and rises as you add more noughts to the price.
You may also have to pay an arrangement or lender’s fee. If you’re re-mortgaging, lenders often waive this charge to entice you to stay with them. However, it’s unusual for first-time buyer mortgages to be free of this fee.
The property itself must undergo a survey. This is to ensure that the house is worth what you and the vendor say it is. The lender is not going to stump up £250k for a house that’s worth half that.
Land registry fees also vary depending upon the price and scope of your new home. These may or may not be included in the other legal fees. When you appoint your solicitor, they’ll tell you how much they charge for the service and any other costs you may face.
What a bigger deposit can do for you
Until you’ve seen and priced your property, it’s difficult to gauge the exact amount of your up-front costs. This is just one reason why it’s imperative to have as much set aside for your deposit as possible.
Here are a few more reasons that may tempt you to tighten your belt until you have a more sizeable deposit:
All mortgage lenders (or brokers) will assess your affordability before they check your application. If you only have a small deposit, it may be that they scrutinise your income and outgoings that little bit harder;
Negative equity is less probable the larger the deposit you have to put down. If you have only 5%, there’s little room for market movement. If you have 40% set aside, the market would have to almost collapse before the bank was in danger of losing its money;
The scope of lenders willing to process your application will increase if you have a larger deposit. Some of the most competitive deals begin at 15% deposit and upwards. Some lenders don’t offer 95% L-T-V mortgages at all.
The more competitive your deal, the lower your mortgage interest rate, the less your monthly repayment will be. You’ll also be paying that interest on a much smaller balance if you can find 20-25% deposit, compared to 5-10%.
To get an idea of the variation, we’ve arranged our best-buy contractor mortgages in easy look-up tables. You’ll also get an idea of the terms (fixed rate, duration, etc.) that go with our range.
But for a competitive contractor mortgage, deposits of 10-15% are what you should be aiming for as a minimum. Yes, you can get onto the property ladder with only 5%. But only with select lenders and at less competitive rates.
Author: John Yerou
John Yerou is the owner and founder of Freelancer Financials; a trading style & trade mark of the award winning Mortgage Quest Ltd. One of the most recognised names in providing mortgages for contractors and freelancers across the UK.
In 2004 John began his career in Financial Services as an independent mortgage adviser and broker. John has been instrumental in negotiating bespoke underwriting for contractors with high street lenders.
His presence in the industry as a go-to expert is growing by the day and he is regularly cited and writes in publications both locally and nationally.