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Do I need a bigger deposit for a contractor mortgage?

One of the biggest myths in our industry is that deposits for contractor mortgages are greater than normal. Yes,
you are at an advantage if you can put more down. But youre no more obliged to than permanent workers are.
In this article, Ill clarify:
Why 100% mortgages have all but disappeared;
The minimum contractor mortgage deposit required;
Why the more you put down, the better off youll be in the long run.
Ready? Here we go.

What is (was?) a 100% Mortgage?

Before the credit crunch, you could borrow the full value of the home you wanted to buy from any number of
mortgage lenders.
If you saw a house on the market for 250k, but didnt have anything set aside for a deposit, no matter. Provided
you met the lenders affordability calculation, you could borrow the full amount.
What you have to remember (or realise, depending upon your age), is that the market was different in the run up
to 2007:
House prices were rising on (what seemed like) a never-ending upward whirlwind;
Homes were often sold before they even went up in the Estate Agents window;
Property investment was as safe houses;
Lenders didnt have to worry about negative equity.
If you defaulted on your mortgage repayments, so what? The bank could repossess your home, yet still make a
tidy profit when they put it back on the market. There was little to no risk on their part.
How different the market is today

Negative Equity The Probability Factor

as you can imagine, once house prices began to slump in global recession, lenders attitudes changed. It was
almost overnight, as if someone flicked a switch.
100% mortgages disappeared. In fact, you were lucky if you could find a mortgage with a deposit of less than
20% on the High Street.
Why so cagy? Well, negative equity became a real possibility. Nay, probability.
House prices were plummeting. Not quite as fast (or as much) as theyd risen. But enough to make the banks and
building societies nervous.
In theory, if you only had a 5% deposit, by the time your sale completed, the property could already be in
negative equity. No more safe bet for the lenders. A very real conundrum for the home buyer.
Then with Responsible Lending, lending criteria became as watertight as deposits were steep.

The Minimum Contractor Mortgage Deposit Required

You may think that banks were only thinking of themselves by increasing their deposits. But in hindsight, they also
prevented would-be borrowers from becoming mortgage prisoners. That is, homeowners who couldnt move
because their mortgage balance was greater than the value of their home.
Youll be pleased to know, lenders have moved on from their knee-jerk reactions to the crises. Albeit with the
Government* and FCA accepting the gauntlet and leading the way.
Today, to qualify for the minimum security contractor mortgage, a deposit of 5% is all you need. The lender,
therefore, stumps up the other 95% of the buying price.
So, say if your desired property was on the market for 280,000. Youd need to save at least 7,500 for the
deposit and borrow 266,000 from your mortgage lender.

Help to Buy (Equity Loan and Mortgage Guarantee)

*The Government, as alluded, blazed the trail back to 5% deposit mortgages for contractors. The Help to Buy
scheme was introduced to give everyone a chance of getting onto the property ladder.
The range of Help-to-Buy mortgage products offers a surprising degree of choice. Catering for deposits between
5%-20%, there is a product to suit most purse-strings.
That said, there are more cost-effective ways for contractors to buy their home. The larger the deposit, the lower
the risk you are in a lenders eyes. More often than not, the accompanying interest rates are lower the more you
have to put down, too.

The hidden costs of buying a home

When youre buying a home, there are all manner of costs you may not have budgeted for. Especially if youre a
first time buyer.
Depending upon the value of the home youre buying, you must build Stamp Duty into your budget. This starts at
1% and rises as you add more noughts to the price.
You may also have to pay an arrangement or lenders fee. If youre re-mortgaging, lenders often waive this
charge to entice you to stay with them. However, its unusual for first-time buyer mortgages to be free of this fee.
The property itself must undergo a survey. This is to ensure that the house is worth what you and the vendor say
it is. The lender is not going to stump up 250k for a house thats worth half that.
Land registry fees also vary depending upon the price and scope of your new home. These may or may not be
included in the other legal fees. When you appoint your solicitor, theyll tell you how much they charge for the
service and any other costs you may face.

What a bigger deposit can do for you

Until youve seen and priced your property, its difficult to gauge the exact amount of your up-front costs. This is
just one reason why its imperative to have as much set aside for your deposit as possible.
Here are a few more reasons that may tempt you to tighten your belt until you have a more sizeable deposit:
All mortgage lenders (or brokers) will assess your affordability before they check your application. If you only
have a small deposit, it may be that they scrutinise your income and outgoings that little bit harder;

Negative equity is less probable the larger the deposit you

have to put down. If you have only 5%, theres little room for
market movement. If you have 40% set aside, the market would
have to almost collapse before the bank was in danger of losing
its money;
The scope of lenders willing to process your application will
increase if you have a larger deposit. Some of the most
competitive deals begin at 15% deposit and upwards. Some
lenders dont offer 95% L-T-V mortgages at all.
The more competitive your deal, the lower your mortgage
interest rate, the less your monthly repayment will be. Youll also be paying that interest on a much smaller
balance if you can find 20-25% deposit, compared to 5-10%.
To get an idea of the variation, weve arranged our best-buy contractor mortgages in easy look-up tables. Youll
also get an idea of the terms (fixed rate, duration, etc.) that go with our range.
But for a competitive contractor mortgage, deposits of 10-15% are what you should be aiming for as a minimum.
Yes, you can get onto the property ladder with only 5%. But only with select lenders and at less competitive rates.

Author: John Yerou

Owner and founder of Freelancer Financials, a trading style & trade mark of Mortgage Quest Ltd
who are one of the most instantly recognisable brand names in providing mortgages for
contractors and freelancers across the UK.
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