Why a deposit?

Cliecost

Hi,

This might sound like a stupid question but I have no clue about mortgages because I don't work in the field and I don't have one.

Why do they have a deposit? Isn't it effectively just a loan secured against the property?

If you applied for a £10,000 loan and the bank said they were going to charge you a fee and wanted you to pay them £2000 first you'd tell them where to go.

Why, when the bank know that if you default they get the property, do they also need a deposit?

(On a side note - being that the word 'deposit' is used, does that mean you'll get it back? Probably another stupid question lol)

argomatt

The mortgage is a different kind of loan because it is secured on the property.

If you don't pay then the bank will sell the house to get their money back. Because they want to sell it quickly and don't know what condition the house will be in when they come to sell it, they might not get the full market price for it.

So to be sure they are in with a good chance of getting all their money back should they need to sell the house, they won't lend you the whole price you paid for it, you are expected to make up the difference and this is called the deposit.

It is not refundable but is the start of your equity in the house, which then builds (in theory) as you pay down the loan.

The deposit is not a fee and does not get paid to the bank. The mortgage and the deposit are added together and form the money you pay to the seller for the price of the house.

Cliecost

Do mortgages make sense to you?

By that I mean, do they seem logical and well thought out or an evolution of something ancient that just got slightly changed over time as it was easier to change it slightly rather than completely revamp it?

PasturesNew

It is a deposit on the property, not a deposit on the loan.

You provide the deposit on the property - when the bank sees you have enough money to put a deposit down on the property they will consider if you're a worthwhile risk to lend you the rest of the money.

The deposit is not a deposit on the loan.

No, you don't get the deposit back. The deposit doesn't go to the bank. The deposit is on the house so the deposit + loan goes to the person selling the house.

The deposit provides some evidence that you've got an interest in paying the loan off and not defaulting.

argomatt

They didn't to start with, but now I am about to start on my third mortgage I have picked up bits of the way they work along the way.

I don't understand the exact details of why they are set up the way they are though.

It helps me to understand by thinking from the banks point of view. If I was lending money out to someone, I want to be as sure as I can that I will get it back, and how I could arrange things to achieve that.

The wikipedia page has got some more details on how the industry works

http://en.wikipedia.org/wiki/Mortgage_industry_of_the_United_Kingdom

kingstreet

Your deposit is your share in your home.

A loan is the bit you need to borrow because you don't have the whole purchase price in cash.

The mortgage is the "security", the certificate, if you like, which ties the loan and the property together.

If you want to buy a car, a lender may want you to put some money into the purchase from your savings and lend you the rest. It's the same principle.

You are less likely to default if you have a stake in the asset.

John1993_2

Cliecost wrote: »

Do mortgages make sense to you?

By that I mean, do they seem logical and well thought out or an evolution of something ancient that just got slightly changed over time as it was easier to change it slightly rather than completely revamp it?

Yes, absolutely. If they don't to you it's quite possibly because you don't seem very clear on how they work.

If you want to buy a house for (for example) £100,000, then it'd be normal for you to pay £20,000 out of your savings, and borrow the other £80,000. The £20,000 is your deposit, and banks want it both to see that you can manage your money well, and to reduce the risk of them losing out of they have to reposess the house.

afly

I think it has been explained rather well above. If it helps, think of it as being an compulsory investment rather than a deposit.

You go into business with the bank to acquire the asset. Your investment is x% and you now own x% of the property. Theirs is the rest. Over time you then start buying the banks investment from them until you own all of the property

It's devised like this to ensure both parties are fully committed to the investment and to offer the bank a surety that they can reclaim the bulk of funds should things go awry.

It's a fair arrangement as the bank take the biggest risk

Thrugelmir

Cliecost wrote: »

Do mortgages make sense to you?

By that I mean, do they seem logical and well thought out or an evolution of something ancient that just got slightly changed over time as it was easier to change it slightly rather than completely revamp it?

A mortgage is merely a term for a loan. The loan is like any other. The word mortgage itself comes from the legal charge placed on the property to secure the debt.

The word mortgage is actually from French law in origin. Literally means death contract. Either the pledge dies when the debt is repaid or the house is repossessed.

opinions4u

You are less likely to default if you have a stake in the asset.

This is the be all and end all.

Borrower with a 100% mortgage gets in to trouble, they don't care.

Borrower with a 95% mortgage gets in to trouble, they work harder to pay the mortgage.

Borrow with a 75% mortgage gets in to trouble, they work harder still to pay the mortgage.