To get a mortgage you need to put down some money yourself, this is known as a deposit. The more of your own money you put towards the purchase of your new home, the lower the interest rate will be that your mortgage lender will give you on your borrowing.
You will hear your deposit referred to as a percentage of the property purchase price, you could have a 10% deposit or maybe a 15% deposit. Your mortgage loan is then referred to as the remaining percentage so either a 90% loan or an 85% loan and this is known as your “Loan to Value” – see loan to value blog for a better explanation.
Your deposit can come from various sources, but wherever it comes from it will need to be traceable. This means that your mortgage lender, and your solicitor, can see where the money originally came from. This is because here in the UK we have what is known as Money laundering regulations which are checks to confirm that all money is from legitimate sources and not illegally gained. Your deposit could come from (but not restricted to) you saving over time, inheritance, divorce or separation settlement, investments, or can be from immediate family in the form of a gift. Be aware you cannot borrow your deposit in the form of a bank loan, your mortgage lender will not allow you to do this and even if they did the monthly repayments would affect your affordability and therefore your mortgage amount.
The most common form of deposit, at the moment, for first time buyers is a gift from a family member. Known as a “gift” this form of deposit has to be given with no strings attached. Meaning that the person offering the gift does not expect it to ever be repaid and they do not want any hold over the property it is used to buy it with. They will need to sign a letter confirming this, and also produce ID and bank statements showing the fund in their own account before it is transferred to you.
Interesting- gifted deposits are seen as received from what has been named the “Bank of Mum and Dad”, and this is currently seen as the 6th largest bank in the UK, just simply because so many deposits now come from family members.
