Saving up for a deposit is a rite of passage for every first time home buyer. Depending on the type of property you are aiming to buy, you might have looked into different kinds of mortgages, and be familiar with the fact that you might have to save up a 5%, 10% or 20% deposit to pay for your new home. However, you might also come across the term ‘exchange deposit’, and wonder how this relates to the mortgage deposit. In this guide, we take a look at what is an exchange deposit when buying a house and much more.
Your mortgage deposit is the total amount of money that you are putting into your home. The rest of the cost of your property comes from your mortgage provider. This will be referred to as a percentage, as it reflects what percentage of the property you are buying outright, versus what proportion you are buying with money borrowed from your lender.
Most lenders will offer various levels of mortgage, from 95% (with you paying 5% of the cost) to 90%, 80% and so on. Taking out a smaller mortgage – and contributing a higher percentage of the property out of your savings, is generally considered lower risk and can help you secure a mortgage with a lower interest rate. You can always get in touch with Mortgage Mentor if you want to find out more about different mortgages rates, and how you can find the most appropriate mortgage for your circumstances.
Of course, saving up a large deposit isn’t necessarily realistic for first-time buyers, especially if you are paying rent whilst trying to save. That’s why first time buyers can generally access mortgages that only require a small mortgage deposit, like the help to buy schemes.
The exchange deposit is a set figure of 10% of the total sales price, which the buyer’s solicitor will pay to the seller’s solicitor at the point of exchange. This is the point when the sale becomes legally binding, and if the buyer pulls out after this, they lose the 10% deposit they have paid. They may also be subject to legal action by the seller and served with a notice to complete.
The 10% figure is the industry standard, although a smaller exchange deposit can be negotiated by solicitors if there is a particular need. When you finish the transaction – known as “completion”, the rest of the money owed on the property will be paid to the seller. This could come from a mixture of the buyer’s savings and money from the mortgage lender. If you have secured a 90% mortgage, the figures would match up, and the remaining balance paid to the seller would be the 90% you borrowed from the mortgage provider.
No! The mortgage deposit is just a way of defining what proportion of the total sales price you are paying out of savings, versus what you are borrowing. The exchange deposit is an actual sum of cash you will send to the seller upon exchange of contracts. Here are some possible scenarios.
On the day of exchange, you owe the seller £10,000. You pay this from your savings. This is the exchange deposit.
On the day of completion, you owe them a further £90,000. You pay the remaining £20,000 you had saved, and the £70,000 you have borrowed from the mortgage provider.
On the day of exchange, you owe the seller £10,000. You pay this from your savings. This is the exchange deposit.
On the day of completion, you owe them a further £90,000. You have no further savings, but your 90% mortgage covers the rest of the cost, and this is how you pay them the sale price.
Sellers have the right to insist on a 10% exchange deposit, although some may be willing to negotiate this down to 5%. This is increasingly common for first-time buyers and should be negotiated through your solicitors. It is particularly straightforward for new build properties, where the seller is effectively a large housing company who are not reliant on the 10% exchange deposit for a specific purpose.
First, it’s worth understanding what a chain is when it comes to property. Simply put, a chain is a series of home sales that are reliant on each other. As an example;
Alex is a first-time buyer, he wants to buy Barry’s flat which costs £200,000. Barry is moving from a flat to a house, and he is interested in buying Charmaine’s house, which costs £300,000. Meanwhile, Charmaine is upsizing to a bigger house, which she is buying from Davina for £400,000. Davina is emigrating, so she isn’t buying a new property.
These purchases form a chain; A - > B -> C -> D. If any one of the buyers (Alex, Barry or Charmaine) pull out, all of the other sales fall through. If Alex decided not to buy Barry’s flat, Barry couldn’t buy the house from Charmaine, and in turn, Charmaine couldn’t buy Davina’s house.
When a chain exists in this way, it’s typical for all of the parties involved to agree to exchange on the same day. This means that when Alex pays his 10% exchange deposit of £20,000 to Barry’s solicitors, they can immediately use this money towards the 10% exchange deposit of £30,000 that Barry needs to pay Charmaine’s solicitors. Barry would need to top this deposit up with another £10,000 to get to the required total – although it may be possible for Barry’s solicitors to have negotiated in advance to pay a smaller deposit. The people further down the chain may be willing to accept a smaller exchange deposit if it helps to keep the chain viable.
Exchange is usually on the same day for all properties in the chain, because it helps the buyers later down the chain use the exchange deposit they receive, to pay the next exchange deposit they owe. In our example above, it means that Barry only has to find £10,000 in savings to top up the £20,000 from Alex, rather than having to pay £30,000 out of his savings to Charmaine.
If you have any more questions about what is an exchange deposit when buying a house, get in touch with our team today!
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