Confused about "10% deposit required on exchange of contracts"

DpchMd

Hi All,

I'm selling my house to a FTB for 240k, and I'm buying a New Build for around 400k. The chain is therefore very small.

I of course understand that I will be paying my lender a deposit for a mortgage, which will come from the equity in my current home.

In the buying guide for the New Build, it says a 10% deposit is required upon exchange of contracts.

I would struggle to free up this money, and don't really understand it.

What will happen?

G_M

DpchMd wrote: »

Hi All,

I of course understand that I will be paying my lender a deposit for a mortgage, which will come from the equity in my current home.
Why would you pay the lender anything? THEY are giving (OK, lending) YOU money. It is the seller of the property you are buying that you must pay!

In the buying guide for the New Build, it says a 10% deposit is required upon exchange of contracts.
This is normal/

I would struggle to free up this money, and don't really understand it. What is not to understand

What will happen?

On Exchange of contracts you give your seller 10% of the agreed price.

On Completion, you pay the remaining 90%. Where you get this money is nothing to do with the seller, or your contract with the seller.

If you are getting a mortgage, the lender will usually provide the money you are borrowing a day or 2 before Completion. Any difference between the amount of the mortgage, and the purchse price, you must find elsewhere eg savings, you mum, credit cards, robbing a post office, or, indeed, by selling your current property.

Meanwhile since you are selling aproperty, your buyer will be giving you 10% of the agreed price at Exchange of contracts.

He will give you the 90% balance at Completion.

AdrianC

When you sign and exchange the contract, you are committing, legally, to buying. The 10% deposit is a sign of that commitment and - if you later pull out - is forfeit, as compensation to your vendor.

Same from your buyer to you.

So, on exchange day, your buyer's solicitor hands your solicitor £24,000, and your solicitor hand that - plus £16,000 of yours - on to the solicitor for the seller of the place you're buying.

It's exactly the same as when you bought the place you're now selling.

DpchMd

G_M wrote: »

On Exchange of contracts you give your seller 10% of the agreed price.

On Completion, you pay the remaining 90%. Where you get this money is nothing to do with the seller, or your contract with the seller.

If you are getting a mortgage, the lender will usually provide the money you are borrowing a day or 2 before Completion. Any difference between the amount of the mortgage, and the purchse price, you must find elsewhere eg savings, you mum, credit cards, robbing a post office, or, indeed, by selling your current property.

Meanwhile since you are selling aproperty, your buyer will be giving you 10% of the agreed price at Exchange of contracts.

He will give you the 90% balance at Completion.

Thanks G_M, so do I understand this correctly now?

My buyer will transfer my solicitor 24k on exchange of contracts, and I will need to find another 16k for my solicitor, so that I can pay a 40k deposit to my seller?

This combined with stamp duty and fees poses a serious cash flow problem. I was expecting to be able to fund the deposit of the new property entirely through the sale of my current home.

Thanks for your help.

AdrianC

DpchMd wrote: »

This combined with stamp duty and fees poses a serious cash flow problem.

Fees and SDLT don't have to be paid in advance - the solicitor will normally retain funds from your sale to pay for those.

DpchMd

AdrianC wrote: »

Fees and SDLT don't have to be paid in advance - the solicitor will normally retain funds from your sale to pay for those.

Well that's a relief!

How do I know my buyer has 10%? What if they were planning to get a 5% deposit mortgage? Will my solicitor insist on 10%?

Still a little lost.

AdrianC

DpchMd wrote: »

Will my solicitor insist on 10%?

Yes. .

Smi1er

The 10% is a standard charge but not cast in stone.


Last place we bought there was no chain. I asked seller could we cut the deposit to £10K. He agreed on the understanding (and this was written into the contract) that if we pulled out after exchange then the remainder of the 10% would become payable.


We agreed to this and thanked him.

DpchMd

Smi1er wrote: »

The 10% is a standard charge but not cast in stone.

I guess this is why I still don't understand it.

If my buyer only has a 5% deposit, then it is unlikely that they will be able to pay me 10% which means I will be unable to pay the 10% which means it will all collapse.

I'm reading about exchanging and completing on the same day - not possible given my chain? or probably unnecessary? Should I stop worrying about this?

AdrianC

You're confusing the loan-to-value "deposit" (ie a 95% mortgage is a 5% "deposit", or cash contribution from the buyer) with the contractual deposit due on exchange of contracts.

If somebody's on a 90%+ mortgage, they'd either exchange and complete at once or have some way to draw down part of the mortgage before completion in order to exchange.

Since you have substantial equity in the place you're selling, your mortgage is much less than 90% LTV - probably about 50-60%? So the lender will be unwilling to do that, I'd presume. Your cashflow is not, brutally, their problem. I'm quite surprised this has only come up at this late a stage.

G_M

If your buyer has only 5% of the purchase price available, it is up to you (via an instruction to your solicitor) to decide if you are willing to accept this, or not.

If not, your buyer must find, steal, borrow, beg the missing amount, or withraw from the purchase.

Likewise, you can ask your seller if they are willing to accept less than 10%. They can agree, or not.