What’s the difference between a mortgage deposit and an exchange deposit?

If you’re a first-time buyer, all the talk of deposits can be both confusing and alarming in equal measure. Mortgage deposits, exchange deposits… If you’re buying a home, you’ll need to find the money for both of them. But what exactly are they? And what’s the difference between the two?

If you’re a first-time buyer, all the talk of deposits can be both confusing and alarming in equal measure. Mortgage deposits, exchange deposits… If you’re buying a home, you’ll need to find the money for both of them. But what exactly are they? And what’s the difference between the two?

Mark Gordon
From the Mortgages team
4
minute read
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Posted 30 SEPTEMBER 2021

What’s the difference between a mortgage deposit and an exchange deposit? 

You can boil it down to this: a mortgage deposit is the amount you contribute upfront towards the price of your home. You’ll tell your lender how much deposit you can provide when you apply for a mortgage. An exchange deposit is paid when you exchange contracts on your new home.

Mortgage deposits explained 

When you want to take out a mortgage, you’ll be asked to provide a chunk of the purchase price of the property you want to buy upfront. This is called a deposit. 

The bigger the deposit you can provide, the better. If you can put down a hefty deposit, you’ll have what’s called a lower loan-to-value ratio. The lower your loan-to-value ratio, the more access you’ll have to better mortgage deals.

How much is a mortgage deposit? 

As a general rule, your deposit will need to be at least 10%-20% of the purchase price of the property, although there are 95% mortgages available.

The size of deposit you’ll need for a mortgage will also depend on the type of mortgage you’re applying for. A buy-to-let mortgage, for example, generally requires a deposit of at least 20% and in some cases, as much as 40%.  

The amount you’ll need to have also depends on where you live. The average first-time buyer deposit in the UK is just under £60,000. But in London, first-time buyers now need around £130,000 on average.

What’s the minimum mortgage deposit I can pay? 

It depends on your lender and current market conditions. Some lenders will give you a mortgage with a 5% deposit, and Help to Buy Equity Loans for first-time buyers are available with a 5% deposit.

Can I buy a house with no deposit? 

It’s possible to buy a property without a deposit, as some lenders offer 100% guarantor mortgages. With this type of mortgage, you’ll need to find someone who’s willing to cover the repayments if you can no longer pay them. If you can persuade a parent or grandparent into volunteering, this can be a good option. But these types of mortgages are considered very risky, so don’t be offended if they say no.

Exchange deposits explained 

When the time comes to exchange contracts on the property you want to buy, you’ll need to pay an exchange deposit. Your solicitor will pay the deposit to the seller’s solicitor. 

Exchange is the point where your purchase becomes legally binding. Until this point, either you or the seller can pull out whenever you like. But if you pull out once contracts have been exchanged, you’ll lose your deposit.

Do I need to save up for two deposits? 

No, don’t worry. The funds for your exchange deposit will usually come from your mortgage deposit. Your mortgage deposit is the only one you’ll have to save up for.

How much is an exchange deposit? 

Unless you and the seller agree otherwise, an exchange deposit is usually 10% of the purchase price. So if you have a 95% mortgage, you may need to negotiate with the seller to pay less. You should do this through your solicitors.

How do exchange deposits work if I’m not a first-time buyer? 

If you already own a home and you’re moving, your money will be tied up in the equity of your home – so you might not have any cash to use as an exchange deposit. 

However, this shouldn’t be a problem, because your exchange deposit comes from the exchange deposit of the person buying your home. If this isn’t enough – say, for example, your buyer puts down £20,000 as a deposit on your current home, but you need £30,000 as a deposit on the property you’re buying – you can negotiate with the seller.

Frequently asked questions

What happens if I back out of a property purchase after I’ve paid an exchange deposit?

Once you’ve paid an exchange deposit, you’ve reached what’s called ‘the point of no return’ on your property purchase. If you back out at that point, you’ll lose the money you paid as an exchange deposit.

What happens if I back out of a house sale but only paid 5% exchange deposit?

If you don’t complete the purchase and you’ve only paid 5%, not the standard 10% exchange deposit, then you’ll still be liable for the other 5%. If you don’t pay the seller, they’ll be within their rights to take you to court and sue you for the money. If this happens, you could be forced to pay damages too.

What happens if the seller backs out after I’ve paid an exchange deposit?

If the seller backs out after you’ve paid an exchange deposit, then you’ll get it back in full. You’ll also have grounds to sue them for any financial losses you might have suffered.

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