First time buyer- How to decide how much to put toward a deposit?

Question

I live and work in the UK, and am starting to look seriously into buying my first house. I have thought about looking to buy a few times over the last few years, but ended up deciding not to for various reasons.

Having had a cursory look at properties on rightmove, just to get an idea of what's available, and roughly how much a property that fits my requirements is currently being sold for, I then had a quick look into mortgages, to see how much I could afford to borrow. The Loan-To-Value rate I was quoted at one mortgage broker was roughly 65% (for a property at the upper end of what I had looked at).

What I'm unsure about, is how to decide how much I should stump up for a deposit towards a property... According to an article on Which?, (July 2019), you'd need at least a 5% deposit to get a mortgage in the current market, but the average deposit in the first half of 2018 for first time buyers was 16% of the property value.

I am in the fortunate position of having been able to save a large percentage of what I've earnt for a good few years now, and could realistically put up to ~40% of the property value down as a deposit (for properties at the higher end of what I'm looking at)- which ties in with the LTV rate I have been quoted.

But since this is at the higher end of the value of properties I am looking at, I obviously could consider some cheaper properties, for which the deposit value I have would be a greater percentage.

All of this is obviously while ensuring that I have something set aside as a 'rainy day fund'.

How can I decide what my budget should be? What are the factors I should be considering in this decision process?

Answer 1

As much as you can reasonably afford

As long as you still have an emergency fund(which you noted you will have) then its always a good idea to put down as much as you can afford for the deposit.

The more you put down now the less time repayments will take or the less the monthly outgoing will be. The higher monthly payments you can afford the shorter the mortgage will be. The main goal is to reduce the length of your mortgage as much as possible and pay it off in the shortest time so that you pay less interest.

Answer 2

The question you really need to answer is: What else could I do with the money?

Consider that you may need to furnish the house, or you may want to improve or remodel it, and you should reserve some funds to do that.

You also need to consider how the down payment affects the transaction. For example, you will most likely get a better interest rate with 20% down than you will with 10%. Or, in the US, less that 20% down typically adds a requirement for PMI, which is an additional insurance payment you have to make every month. Generally speaking, the bigger the down payment, the smoother the transaction will be, and it will cost you less, certainly in the long run.

If you don't have any needs, wants, or goals, then I agree that you should put down as much as you can reasonably afford.

Answer 3

Well besides that usually the money percentage you put down influences the interest rate (the more you put down the cheaper interest you get) you should consider the opportunity cost.

This means if you recieve a higher interest on an investment than the rate of the mortgage it makes more sense to invest and have a higher mortgage.

Answer 4

I would like to extend @Mohair's answer.

A mortgage is a very cheap credit. Current interest rates in the UK seem to be around 1.5% (plus setup fees). Could you make more than 1.5% if you invest that money elsewhere (stocks, funds...)?

If you use a tax-sheltered vehicle like an ISA, you could potentially be better off by paying a small deposit and placing the rest of your savings in a high-return fund.

Of course, there are many factors to take into account like risk, psychological safety, etc. Some people prefer to pay off their mortgage ASAP even when it's not the most financially sensible option.

Answer 5

In the US and likely most other parts of the world real estate is expensive to transact. So in this case, it is best to find a home that meets your needs now and your anticipated needs in the future. You do not want to purchase a home today, that is a lower price, only to upgrade a short time later. Since you can afford it, buy the upgrade now.

So to me, your primary focus should be on the home that will meet your needs.

Next, and it really is liberating, the best way to buy a home is with the 100% down plan. As you state, the most you can realistically cover is 40%, so I would should for at least 20% and possibly more while retaining a good emergency fund.

Answer 6

I'm going to disagree with everyone here and say the opposite.

You should put as little as you can into a deposit without incurring extra fees

Extra fees could be in the form of mortgage insurance, higher interest rates etc.

Put as little as you can into your deposit and then make sure you have an offset account to put the rest of your money.

The reason for that is money you put towards your deposit gets locked in - you can't easily take it out again without re-financing.

The money in your offset account will still offset your interest just the same but you can freely withdraw from it. It also serves as a rainy day fund if you lose your job or have a period of no income, because you can withdraw from the offset for a while.

Answer 7

Think also about the cashflow. What will happen if you lose your lucrative job?

Best is to make a down-payment to a house in which you will still want to live in 10 years, and which still leaves you with reasonable emergency fund (fix home issues, unemployment, health etc). Then, get 15 or 30 year FIXED mortgage (no surprises) which you can easily afford to pay, and pay as much as you can early (aim to pay it down in 10 years if you can).