Why do Mortgages need Deposits and how much Should you Save?
A mortgage is very different to other types of borrowing because you have to put down a deposit on the home that you are using it to buy first. This deposit normally has to be a percentage of the cost of the home and will therefore vary depending on how much you are borrowing.
Why do you need a deposit?
You may wonder why you need to use a deposit on a mortgage when no other form of borrowing needs this. There are a couple of possible reasons for it. It protects the bank against negative equity. This means that if the house loses value and they sell it because you are not paying the repayments, then they want to make sure they get back as much as they lent you. If they lend you the full value of the home, they will not get it all back because of the costs of selling it as well as the risk of the value dropping, particularly in the short term. The deposit also shows the lender that you are capable of putting away some money each month. They will then be more likely to trust that you will be able to make the monthly repayments. As a mortgage lasts so long and you borrow a huge amount of money, they want to be absolutely certain that you are capable of making the repayments and they will check this in many ways, including making you get together a deposit.
How much to save
Saving for a deposit can be really hard work. If you are paying rent at the same time it can be particularly difficult to find enough money to put away a significant amount every month. However, if you do want to buy your own home, then you will need to save up enough money to be able to pay a deposit towards it.
It is worth starting by investigating the houses in the area that you would like to buy and their prices. Think about whether you need a certain amount of rooms, to be near public transport, whether you need parking, garage, garden and things like that. Once you have thought this through you will be able to see how much the houses that fit your criteria cost. You may decide that you want to live in a cheaper area, due to the cost of the houses and decide to investigate there. Once you have decided on the area and the size of home and features you need you will be able to carefully examine the prices and figure out how much you are likely to have to pay. Do take the costs of moving into consideration. Then you will know how much you will need to save as a deposit as you generally need 5% of the asking price as a minimum.
Once you know how much you need to save, then you will be able to decide how much to save each month. House prices tend to go up and so you will need to consider that the longer you take to save; the more money you will need in order to get the 5% deposit that you will need. It can be wise to set up a transfer each month just after you are paid to have some money put into a savings account towards it. This will then not be spent on other things. To calculate how much to transfer, look back at several months of past bank statements and you will see how much money you tend to have left at the end of a month. You can use this amount as a guideline. However, it can be wise to be careful with your spending, particularly on luxury items, so that you have more to save towards a deposit. You could also then pay in anything you have left at the end of the month towards the deposit as well. If you wait to save anything until the end of the month, you may find that you spend too much and leave nothing to save, but if you save first, it will not be there to spend and so you will be more likely to save more money.
The more money you save up, the quicker you will be able to buy your home. If you are really motivated to move, perhaps having already found a place you want to move to or just desperate to get a place of your own, then you will find it easier to save. You will be happy going without things because you will know that you will be able to get a house as a result of it. If you are not so enthusiastic, then you may not be prepared to give up so much for a deposit and may be prepared to wait longer for a home of your own.
A mortgage is a loan and the more that you borrow, the more expensive it will be. This means that if you are able to save up for a larger deposit then you will be able to borrow less money and that will mean that you will not pay so much for the loan. The cost of the loan is calculated as a percentage of what you owe and so the less you borrow; the less you will pay for the loan. You may also be able to pay it back sooner, if you borrow less money and that will save you money in interest as well.
Therefore when you are deciding how much to save it is a good idea to think about how you can save as large a deposit as possible. Then you want to try to save as much money as you can towards it each month. It can mean that you will have to work hard at spending less money and possibly working more in order to earn it too, but it could be worth it if you are paying less in mortgage interest over the next 20-30 years.