Dealing with deposits

The mortgage landscape has certainly changed a lot since the days before the 2008 financial crisis.  Now the key word for both residential buyers and landlords is “affordability” and although the concept of affordability is defined in different ways depending on whether the buyer is looking for a property to live in or a buy-to-let investment, but in either case lenders now have a legal obligation to undertake reasonable checks to ensure that the prospective borrower, can, in fact, manage their mortgage over the long term, even if interest rates rise.  They also have an obligation to their shareholders to manage their businesses responsibly and, essentially, avoid getting into the sort of situations which led to some of their number having to be bailed out by public funds. Deposits make a difference There are two reasons why deposits make a difference.  The first is the fact that they protect the bank both from short-term fluctuations in house prices and from adverse changes in the borrower’s circumstances.  Essentially the price of the house has to fall below the sales price minus the deposit before the bank’s funds are at risk and the bigger the deposit, the lower the price can drop before the bank has to face the potential loss of its capital.  Secondly, quite simply, being able to save for a deposit indicates that you are able to save in general, which indicates both that you have disposable income and that you know how to manage it.  This, of course, is a very good sign for lenders. Building a deposit While there are lots of good reasons why lenders like to see large deposits, there are also lots of good reasons why people may struggle to put together the sorts of deposits lenders like to see, especially if they are having to pay rent as well.  The challenge can be particularly difficult for people living in parts of the country where housing prices are highest (such as London and the south east), especially for younger people at the start of their careers, who are unable to call on help from the “bank of mum and dad”.  This fact has been recognised by the government and has led to the development of a number of schemes to help first-time buyers, including the Lifetime ISA and the Help to Buy Scheme (not to be confused with the Help to Buy ISA, which has now been discontinued).  Both of these schemes (and other options), may be helpful in certain situations, but it is strongly recommended to take professional advice regarding them (or any other options) so as to be sure you understand how they work, their specific requirements and their advantages and disadvantages. Saving for a house At this point in time it is probably fair to say that for most people saving for a house will be a medium- to longer-term project and that as such it will need to be managed as part of an individual’s overall financial goals.  Placing disposable income into investments such as equities, which may generate returns far in advance of interest rates on cash deposits may help to grow a deposit more quickly, but individuals should always remember that such investments generally carry some risk of capital loss.  On the other hand, while cash deposits may preserve capital, they will only grow in line with interest rates and may struggle even to keep pace with inflation.  It is crucially important that people strike the right balance between growth and safety and this is an area in which getting the right professional advice can make all the difference. Your property may be repossessed if you do not keep up repayments on your mortgage.