Selling/Buying with Equity - how does it work

rtb_tf

Hi everyone,
My family are in a position now where we’ve outgrown the home we’re in ( we were first time buyers) and are looking to move somewhere with more room to make our long term home. We don’t have much in way of deposit sat in the bank but have about 40k equity in our current house. To use that equity would we have to sell and complete the sale on our house and have the money sat in our bank before we could proceed ourselves? I’ve read on a few pages that we’d need to pay our deposit when we exchange contracts, is that right? 

Any help or insight would be greatly appreciated.

eddddy

It's usual to buy and sell at the same time on the same day - so you can use the equity from your current house as part payment for the new house.

Your buyers will pay a deposit when they exchange contracts to buy your house - typically, you can use that as your deposit on exchange for the new house.

(Although, it sounds like you've been unable to save up any money with your current mortgage payments, so are you confident about being able to afford the new higher mortgage payments?)

Mickey666

There are (usually) two types of deposit when buying a house.  The first is the amount required to make up the purchase price when applying for a mortgage and the second is the amount required when exchanging contracts.

For example, a FTB buying a £100k property might only be able to get a mortgage of £85k, leaving them to find £15k.  That £15k is typically referred to as their deposit.  When it comes to exchanging contracts they will be required to pay a certain amount for their solicitor to hold, a deposit, in much the same way that you'd pay a deposit to secure a new car.  The amount of the deposit is typically 10%, so in this example it would be £10k, not the £15k that the mortgage company required as a 'deposit' (which should really be called equity to avoid confusion).

A non-FTB will already have their own home to sell and will (usually) have equity in it.  Let's say it's an £80k house and they have a £50k mortgage, so they have £30k equity.  They now want to buy a £100k house, which is £20k more than they currently have (current mortgage + equity) so they need to increase their mortgage from  £50k to £70k and they will be buying the new £100k house with 30% of the price being their equity from their existing house.  When it comes to exchanging contracts they will have to pay a deposit to their solicitor (exactly as the FTB did) and again this will typically be 10%, so £10k in this example.

So when lenders talk about borrowers needing, say, a 15% "deposit" what they really mean is that they will only lend 85% of the property value and the lender has to find 15% of the price - but in practice this can be equity or cash and is nothing to do with the "deposit" you pay to your solicitor on exchange.

One other thing, although the deposit on exchange is typically 10% there is no legal requirement for this, it's just a convention.  It can be negotiated in exactly the same way as the house price itself and as long as both parties agree it can be anything you want.

When I bought my first house I had a 93% mortgage and not enough cash for a 10% deposit.  In such circumstances it is often possible to get a short term loan for the 10% amount but I didn't want to do this so asked the seller if they would accept a deposit of just £1000.  They agreed and instructed their solicitor accordingly.  Subsequently, I've never paid a 10% deposit on exchange.  Everything is negotiable

rtb_tf

Thanks Eddddy, just working on numbers though - as an example if we were to sell our house for £185k, our buyer may well only pay a 10% deposit of £18.5k; say we we are able to get a mortgage for a house that with our deposit would enable us to buy a house at £300k we’d then need at least a £30k/10% deposit to exchange contracts, leaving us £11.5k short. Is that right? Would we still be able to proceed? 

Just on the note about coping with bigger payments - my wife and I have had decent career progress over the last 12-18 months, but it’s taken time for us to pay off a couple of other commitments, that coupled with the fact we’ve just dropped £1k a month in nursery fees, it feels like the right time to think about moving.

rtb_tf

Mickey666 said:

There are (usually) two types of deposit when buying a house.  The first is the amount required to make up the purchase price when applying for a mortgage and the second is the amount required when exchanging contracts.

For example, a FTB buying a £100k property might only be able to get a mortgage of £85k, leaving them to find £15k.  That £15k is typically referred to as their deposit.  When it comes to exchanging contracts they will be required to pay a certain amount for their solicitor to hold, a deposit, in much the same way that you'd pay a deposit to secure a new car.  The amount of the deposit is typically 10%, so in this example it would be £10k, not the £15k that the mortgage company required as a 'deposit' (which should really be called equity to avoid confusion).

A non-FTB will already have their own home to sell and will (usually) have equity in it.  Let's say it's an £80k house and they have a £50k mortgage, so they have £30k equity.  They now want to buy a £100k house, which is £20k more than they currently have (current mortgage + equity) so they need to increase their mortgage from  £50k to £70k and they will be buying the new £100k house with 30% of the price being their equity from their existing house.  When it comes to exchanging contracts they will have to pay a deposit to their solicitor (exactly as the FTB did) and again this will typically be 10%, so £10k in this example.

So when lenders talk about borrowers needing, say, a 15% "deposit" what they really mean is that they will only lend 85% of the property value and the lender has to find 15% of the price - but in practice this can be equity or cash and is nothing to do with the "deposit" you pay to your solicitor on exchange.

One other thing, although the deposit on exchange is typically 10% there is no legal requirement for this, it's just a convention.  It can be negotiated in exactly the same way as the house price itself and as long as both parties agree it can be anything you want.

When I bought my first house I had a 93% mortgage and not enough cash for a 10% deposit.  In such circumstances it is often possible to get a short term loan for the 10% amount but I didn't want to do this so asked the seller if they would accept a deposit of just £1000.  They agreed and instructed their solicitor accordingly.  Subsequently, I've never paid a 10% deposit on exchange.  Everything is negotiable

That’s great insight - thank you!

Girlisgettingthere

@rtb_tf We are doing just exactly what you want to do. Our equity from our house sale will be our deposit for our new home. We are due to complete on 4th September for both our current property sale and our new property sale. Hope this helps.

rtb_tf

Girlisgettingthere said:

@rtb_tf We are doing just exactly what you want to do. Our equity from our house sale will be our deposit for our new home. We are due to complete on 4th September for both our current property sale and our new property sale. Hope this helps.

That’s useful, thanks! What did you pay % wise when you exchanged?

eddddy

rtb_tf said:

Thanks Eddddy, just working on numbers though - as an example if we were to sell our house for £185k, our buyer may well only pay a 10% deposit of £18.5k; say we we are able to get a mortgage for a house that with our deposit would enable us to buy a house at £300k we’d then need at least a £30k/10% deposit to exchange contracts, leaving us £11.5k short. Is that right? Would we still be able to proceed? 

As you can imagine, that happens a lot.

You (or your solicitor) would try to negotiate an agreement where you pay only a 6% deposit on exchange. (£18.5k being 6% of £300k).

Sellers often agree - but I guess you might come across a difficult seller.

It might become difficult, for example, if the person selling the £300k house is buying a £500k house, then there's a £700k house next in the chain etc, etc. The seller of the £500k  house (or the seller of the £700k house) might not accept an £18.5k deposit - so somebody in the chain has to introduce some extra deposit money.

Girlisgettingthere

Also not aware of the 2 deposits usually required either? We only paid 1 deposit when buying our current home and that was for our 85% mortgage. Same with this move too - only 1 deposit required for our new mortgage and that is coming from our current sale.

Girlisgettingthere

I am in Scotland however unsure if we have a different process?

rtb_tf

Girlisgettingthere said:

I am in Scotland however unsure if we have a different process?

Ahhh, yeah I think you may be on to something there.