Our Guide to Mortgage Deposits goes into quite a lot of detail about what a mortgage deposit is, where it can come from and the proof you need to show that the money is yours.
But the process of buying a house actually has two stages where deposits are required to be paid.
Most people are familiar with the mortgage deposit. This is the sum of money that you have saved and intend to use to help purchase the property. But when exchange of contracts takes place your solicitors will need an exchange deposit and the amounts of money will not necessarily be the same!
It’s exchange deposit vs mortgage deposit!
Let’s take a look at the difference between a mortgage deposit and an exchange deposit
What is a mortgage deposit?
Your mortgage deposit is the total amount of money that you can afford to put towards the purchase price of the property you wish to buy. The minimum mortgage deposit needed may be affected by your chosen lender. Any money you have set aside to pay for legal fees and surveys etc should not be included in the mortgage deposit figure.
The balance will come from your mortgage lender.
If you are a first time buyer then the deposit will be cash, from your savings. If you are moving from a property that you already own then the deposit will be from your homes equity plus any cash savings that you wish to put towards it.
This overall sum is declared to your lender when you apply and will form part of the calculation to work out the mortgage loan to value (LTV) percentage.
The larger the deposit you can afford, the better. Your deposit will affect four things:
- The size of your mortgage
- The size of your monthly mortgage repayments
- Your loan to value
- The mortgage choices available
Let’s have a look at each one:
The size of your mortgage – This one is pretty obvious. If you can put in more deposit then this will lower the size of the mortgage that you need to apply for, lowering the monthly payments.
The size of your mortgage repayments – If you have a smaller mortgage then your monthly mortgage repayments will also be smaller.
Your loan to value – Your LTV represents the size of your mortgage compared to the property price and expressed as a percentage. So if you increase your deposit, you lower the mortgage needed and so the LTV goes down. What does loan to value mean?
The mortgage choices available – All lenders offer their interest rate products (fixed, tracker etc) based upon loan to value percentages. If you can reduce your LTV then you may fall into a different category where the rates are more attractive.
What is an exchange deposit?
When you are buying a property there are three stages that lead up to owning the property:
1 – Signing the contract – You will need to sign a contract whereby you are agreeing to purchase a specific property for a specific price. The person selling the property will be signing their agreement to sell.
2 – Exchange contracts – Exchange of contracts is an important milestone. The sale contract and the purchase contract are exchanged, or swapped, between solicitors. Your purchase is now legally binding.
3 – Completion – Completion is when you become the new legal owner of the property and the seller has received the full purchase price from you, as noted in the contract.
These stages are coordinated by the solicitors or conveyancers. Our article What does a conveyancer do? covers the main aspects of their work.
Your ‘exchange deposit’ is needed at stage 2, exchange of contracts.
The Standard Conditions of Sale on which your purchase contract will be based, requires that a deposit of 10% of the purchase price is to be paid on exchange of contracts. Ordinarily, your solicitor will request this money from you in advance. Then contracts are exchanged and the 10% is sent over to the solicitors acting for the seller/vendor as your deposit or part-payment.
Where does the exchange deposit come from?
There will be many occasions where the full 10% (as cash) is unavailable.
This would be when you are moving house and using your equity as a deposit or perhaps when a first time buyer is using a 95% mortgage and therefore has only 5% cash.
In these circumstances the solicitors would need to get agreement from their clients to accept a lesser cash deposit upon exchange.
There should be no reason for a seller to request an exchange deposit that is higher than 10%
HERE ARE SOME EXAMPLES
10% cash deposit
| Purchase price | £300,000 |
| Mortgage deposit (10%) | £30,000 |
| Mortgage required | £270,000 |
| Loan to value | 90% |
| Exchange deposit (10%) | £30,000 |
| Completion deposit | NIL |
20% cash deposit
| Purchase price | £300,000 |
| Mortgage deposit (20%) | £60,000 |
| Mortgage required | £240,000 |
| Loan to value | 80% |
| Exchange deposit (10%) | £30,000 |
| Completion deposit | £30,000 |
With the 10% cash deposit example you will be handing over all of your £30,000 deposit in one go. For the 20% deposit example, half is needed for exchange of contracts and the other half is needed for completion. Your solicitor will request money from you at the appropriate point during this process.
What is the exchange deposit for?
It is really a commitment deposit. At 10% of the purchase price it is large enough to stop people just walking away from their agreed purchase at the last minute.
If by agreement you had paid less than the normal 10% then the seller would be able to pursue you legally to reclaim the additional money, up to 10%, plus compensation.
Will I need two deposits?
No, you won’t need two deposits. Your total ‘mortgage deposit’, depending on how much it is, could be paid over in two payments.
The first on exchange and the second on completion. The example above shows how this would work.
Could I lose my deposit?
At the point that you have paid your exchange deposit you have exchanged contracts and are legally obliged to go ahead with the purchase.
If you back out then the seller can keep your deposit.
What happens if I have a 95% mortgage?
Where the mortgage LTV is 95% or 100% then the required 10% exchange deposit is unlikely to be achievable, more so for the 100% borrower.
Between exchange and completion deposits are moved ‘up the chain’ to the other parties and it may cause shortfalls for some people if 5% is paid rather than the expected 10%.
Your solicitor will be aware of the potential issue from the beginning as they will know your mortgage and deposit situation. For many people the solution is to agree a lower deposit, and this is done between the solicitors (with the sellers permission). But if not you may need to borrow the extra money for a short while.
Remortgage deposits
A commonly asked question is: Do you need a deposit to remortgage?
The answer is no, not normally. Although paying a cash deposit, and reducing your LTV, can mean you have better deals to choose from.
