When buying a property, one of the most important considerations is the size of your deposit. Generally, the larger your deposit, the better the terms and interest rates on your mortgage.
However, many clients are often drawn to the idea of a smaller deposit, as it allows them to get on the property ladder with less upfront cost. While a smaller deposit may seem like a good idea in the short term, it can have negative impacts on your affordability in the long run, especially for deposits above 85% loan-to-value (LTV).
Firstly, a smaller deposit means a larger mortgage, which leads to higher monthly payments. This can be a significant burden on your budget, especially if you are already stretching to afford the property. Higher monthly payments also mean less disposable income, making it more difficult to save for unexpected expenses or long-term financial goals such as retirement.
Secondly, smaller deposits generally come with higher interest rates. This is because lenders view clients with smaller deposits as higher risk, and therefore charge more to offset that risk. Higher interest rates mean higher monthly payments and more interest paid over the life of the mortgage, resulting in a higher total cost of the property.
Finally, a smaller deposit can limit your options when it comes to mortgage products. Many lenders have stricter criteria for clients with smaller deposits, including higher credit score requirements, more restrictive affordability checks, and fewer product options. This can limit your ability to find a product that meets your specific needs, and may result in higher costs overall.
At Mortgage321, we always advise our clients to aim for a larger deposit when possible, especially for borrowing above 85% LTV. This helps to ensure lower monthly payments, better interest rates, and greater flexibility when it comes to product options. We also work with our clients to explore alternative options such as government-backed schemes, which can help reduce the required deposit size while still offering favorable terms.
In conclusion, while a smaller deposit may seem like an attractive option in the short term, it can have negative impacts on your affordability in the long run, especially for borrowing above 85% LTV.
At Mortgage321, we strive to help our clients find the best options for their individual needs and circumstances, with a focus on long-term affordability and financial stability.