Saving for a larger deposit can offer numerous advantages, including access to better interest rates, reduced monthly payments and a smoother property purchase process.
Saving for a larger deposit can offer numerous advantages, including access to better interest rates, reduced monthly payments and a smoother property purchase process. With a substantial deposit, lenders may be less stringent with their checks, potentially allowing you to borrow more. However, in today's rapidly rising housing market, waiting to save a higher deposit can sometimes backfire, leading to increased property prices and limited purchasing power.
Let's consider an example:
Imagine a property priced at £180,000. With a 5% deposit (£9,000), your monthly payments for a £171,000 mortgage over a 25-year term at a 5-year fixed rate of 5.09% would be £1,007.
Now, if you choose to wait and save for a 10% deposit, and the property's value increases by around 10% to £198,000 in a year, you'll need a deposit of £19,800. With a lower interest rate of 4.7%, your monthly payments would be approximately £1,015, with a mortgage of £178,200.
Had you opted to buy immediately with a 5% deposit, your mortgage would be less than £171,000, while the property's value would be £198,000. In this scenario, you'd have invested only £9,000 as a deposit, compared to the £19,800 required after waiting.
While it's true that house prices generally tend to rise over time, it's essential to acknowledge that there is always a slight chance of prices dropping. In such a scenario, waiting to save for a higher deposit could potentially yield significant savings. If market conditions unexpectedly shift and prices decrease, those who waited may find themselves in a favourable position, able to purchase the same property for less than they initially anticipated. However, it's crucial to approach this possibility with caution, as predicting market fluctuations accurately is challenging, and the potential for prices to drop significantly is relatively low compared to the likelihood of continued growth.
It's important to note that expecting to purchase the same property for the same price a year later, given current market trends, is often unrealistic. House prices tend to rise, as demonstrated in the above example, which reflects real market conditions over recent years. In essence, delaying your purchase solely to accumulate a higher deposit could end up costing you more in the long term.
Of course, various factors influence this decision, such as your budget, potential wage increases, and lifestyle choices. Some personal circumstances may indeed require a larger deposit. This discussion serves as guidance and not as financial advice. It's crucial to seek personalised advice tailored to your specific situation.
Remember, failing to keep up with mortgage repayments could lead to repossession of your home. Always stay informed about changes in the market and seek professional advice to make well-informed decisions.
[Date: 04/04/2024 - Please note that the information provided was accurate at the time of publication but is subject to change.]
