5% deposit a good idea?

RoisinDove

Hi everyone,

I'm a FTB, single buyer, and have been looking for a property (one bed flat in London) for a month or two now. I'm having trouble finding anything in my budget, quite frankly, and some of my friends have asked why I don't go for the 95% mortgage option. I have been hesitant about this because I don't like the idea of borrowing that much, but would it be a terrible decision if it meant being able to buy a much better property (extra bedroom, better location or just all around nicer) rather than having to make quite a big compromise to buy a place with a 90% mortgage. 

What would you do in my situation?

Angela_D_3

How does the mortgage conpare with current rent ?  Can you over pay it and get the debt down quickly? 

RoisinDove

I've only used the calculator on Rightmove which is quite basic, but it looks like a monthly repayment on a 300K property using a 5% deposit would be about £1250, which is similar to rent. No idea how realistic this is.

I'm not sure about over paying tbh as I haven't looked into this yet. Do you commit to paying more for a fixed time or can you just pay whatever you want each month? 

hazyjo

Most allow you to overpay by 10% a year (not sure if that's per month or in one lump sum over a year, you'll have to check).

I definitely would, but only if I was in a job where I got regular pay rises and felt pretty comfortable I'd be able to find something else if I lost that job.

Would also overpay if I could afford it.

Definitely wouldn't buy a 'riskier' property like a studio or one bed though. Would be 2 beds min for me.

I don't remember ever having large deposits early on. Later, yes, from equity but certainly not from saving or when I first bought!

Sunsaru

With overpaying, you pay whatever you want over the agreed repayment. Be aware that most mortgages only allow you overpay by 10% of the outstanding mortgage balance in a 12 month period.

You best bet would be to speak to a mortgage advisor. They would be able to give you the best advice.

GoingOn30

If you go for one of the cheaper properties with a 10% deposit, it sounds like you'll be wanting to move on to a better property in a year or 2. 
I'd take advantage of the 5% deals and get the better place that you can stay in longer, as long as you have decent job security/employability.

RoisinDove

hazyjo said:

Most allow you to overpay by 10% a year (not sure if that's per month or in one lump sum over a year, you'll have to check).

I definitely would, but only if I was in a job where I got regular pay rises and felt pretty comfortable I'd be able to find something else if I lost that job.

Would also overpay if I could afford it.

Definitely wouldn't buy a 'riskier' property like a studio or one bed though. Would be 2 beds min for me.

I don't remember ever having large deposits early on. Later, yes, from equity but certainly not from saving or when I first bought!

I don't get regular pay rises really but it's relatively secure. I just feel uneasy taking on any debt going into recession but renting forever isn't the answer either. I'll have to look into overpaying...it would be pretty difficult to overpay but perhaps easier than 'normal times' if travel is restricted this year (this is the only thing I really spend money on outside of the survival basics like food and bills). 

I've just thought of an issue though...what's mostly restricting me is the salary multiplier. How does this work if you go for a 5% deposit? Is it any different or is it the same calculation? 

RoisinDove

GoingOn30 said:

If you go for one of the cheaper properties with a 10% deposit, it sounds like you'll be wanting to move on to a better property in a year or 2. 
I'd take advantage of the 5% deals and get the better place that you can stay in longer, as long as you have decent job security/employability.

I've just thought...the main issue is actually that 4.5 times my salary is too low for anything nice and that's the actual problem. Is there any way around this other than going for shared ownership? It's only slightly under, which is very frustrating. As in an extra 20K would make a massive amount of difference....there are lots of nice properties for 300K, but under 280K it becomes slim pickings. 

davilown

RoisinDove said:

GoingOn30 said:

If you go for one of the cheaper properties with a 10% deposit, it sounds like you'll be wanting to move on to a better property in a year or 2. 
I'd take advantage of the 5% deals and get the better place that you can stay in longer, as long as you have decent job security/employability.

I've just thought...the main issue is actually that 4.5 times my salary is too low for anything nice and that's the actual problem. Is there any way around this other than going for shared ownership? It's only slightly under, which is very frustrating. As in an extra 20K would make a massive amount of difference....there are lots of nice properties for 300K, but under 280K it becomes slim pickings. 

Can you expand the area you are looking in? Relocate job? I would be very hesitant to put that sort of money into a flat all things considered, and I think you’re quite correct - recession of sorts is in it’s way.

Just another thought, are you able to save for a little bit longer?  There’s every possibility that prices may be adversely affected of the next 6 months which may make it easier for you to purchase more of what you want

princeofpounds

If you buy a property on a 5% deposit, and property prices go down even 1% without you making up the difference in overpayments, you will not be able to re-mortgage as you do not have sufficient equity to access any deals on the market. You will be stuck on the standard variable rate when your term ends; that is expensive and may even mean you get trapped. It's not quite negative equity, but will be a similar situation.

This is a real risk, made particularly acute because 5% deposit mortgages do not exist a lot of the time, so you may find the goalposts get moved by the mortgage industry to 10% at any point.

So I wouldn't do it.

But if you take the risk and property prices go up whilst 5% mortgage deals stay available, then it will probably turn out to be beneficial overall.

steampowered

As long as you are happy to be in the property for a few years (e.g. a 5 year fixed term mortgage), it is likely to be worthwhile doing this.

The risk with buying at high LTVs is that, if property prices drop, you will be in negative equity and unable to move for a period of time, until your repayments have improved your LTV.

The other risk is that if the market tightens you might be unable to re-mortgage at the end of your term if lending criteria tighten or property prices drop. That would mean going onto a rip-off standard variable rate. However you can mitigate against this by taking a 5 year fixed term, as 5 years of repayments would be plenty to overcome this.

After a few years, the repayments you will make on your mortgage will help your LTV, and you are better off paying the mortgage than rent.