What’s the difference between a mortgage deposit and an exchange deposit?
If you’re buying a home, you’ll need to find the money for both a mortgage deposit and an exchange deposit. But what exactly are these? And what’s the difference between the two?
If you’re buying a home, you’ll need to find the money for both a mortgage deposit and an exchange deposit. But what exactly are these? And what’s the difference between the two?
What is a mortgage deposit?
A mortgage deposit is the amount you contribute upfront towards the price of your new home. You’ll tell your lender how much deposit you can provide when you apply for a mortgage.
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.
Strictly speaking, a mortgage deposit isn’t an actual deposit. When you stump up the cash, it becomes equity in your new home – the portion of the property that you own outright.
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% but, in some cases, as much as 40%.
The amount you’ll need also depends on where you live. You’re likely to need a bigger deposit in London, for example, where house prices are higher.
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 the Help to Buy: Mortgage Guarantee Scheme for first-time buyers is available with a 5% deposit. The scheme runs until 31 December 2023.
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 family member to be a guarantor, this can be a good option. But these types of mortgages are considered very risky, so don’t be offended if they say no.
What is an exchange deposit?
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 property purchase becomes legally binding. This is known as the ‘point of no return’. 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 exchange deposit.
How much is an exchange deposit?
Unless you and the seller agree otherwise, an exchange deposit is usually 10% of the purchase price. If you have a 95% mortgage, you may need to negotiate with the seller to pay less deposit. You should do this through your solicitor.
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.
Here’s a basic example of how it works:
- You buy a house for £250,000.
- Your mortgage deposit is £50,000 (20% of the purchase price).
- The remaining £200,000 (80%) is your mortgage.
- Your exchange deposit is 10%.
- When you exchange contracts, half your mortgage deposit (£25,000) is transferred to the seller’s solicitor.
- On completion day, you’ll pay the remaining £25,000 and your mortgage lender will release the £200,000 mortgage loan.
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 could try to negotiate with the seller. If they won’t accept a lower exchange deposit, you may have to find the extra cash from somewhere else: for example, additional savings or a temporary loan from mum and dad.
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.
Can I use my Help to Buy ISA to cover my exchange deposit?
While the Government’s Help to Buy ISA tops up your savings by 25%, the bonus will only be paid after completion of your first home purchase. However, you can use the rest of your ISA savings as an exchange deposit. If it’s not enough and you’re counting on the additional 25%, you’ll need to find the extra cash to make up the shortfall (until after completion) or see if the seller will accept a lower deposit.
Can I use a Lifetime ISA to cover my exchange deposit?
The Lifetime ISA, which replaced the Help to Buy ISA, offers a 25% Government bonus up to a maximum of £1,000 per year. The bonus is added at the end of each year you save. When you’re ready to put down a deposit on your first home, the bonus will already be in your ISA account so you can use it as an exchange deposit.
