Buying a house can be tempting for a number of reasons. It may be in preparation for starting a family or finding a place that fits your newly acquired status. Whatever the reason may be, the need to think it through is of utmost importance.
Houses are major projects and they do not sell cheaply; thus many of us seek financing by taking out mortgage loans to offset the better part of the amount.
Most lending institutions approve your application once you come up with 5% of the total sum needed but is it possible that you reach a better mortgage agreement if you put down a larger mortgage deposit?
The answer to that question is yes.
Why putting down a larger percentage of mortgage deposit matter
It is popularly advised that one has to save as large a deposit as possible. This is because the larger your deposit, the cheaper your mortgage rate will be.
Derek McGair in an interview with This Is Money shared how he stayed living with his parents and saved hard towards putting down a bigger deposit in a bid to get a better mortgage rate when he bought his first home.
Derek, 28, who is a supervisor at a flooring firm, bought a three- bedroom end-of-terrace home with a big garden in Mehil, Fife.He says: ‘After looking at all the rates on offer I went to my local bank branch to see whether I would qualify for a loan and the application process was far simpler than I’d expected.’He found out that putting down 10% gave him access to better deals.
This post on the totally money website breaks it down, “Mortgages are categorised according to their loan-to-value (LTV).” This means the percentage of the mortgage as a value of the property. So if you have a 10% deposit, you will need a 90% LTV mortgage.
Banks tend to have bands where mortgage rates become cheaper, making a clear working knowledge of what you’re looking for in a mortgage vital. They get cheaper like this because the more equity you have, the lower risk you are to the bank if your house loses its value. Generally speaking:
- Those with a 10% deposit (90% LTV) will be charged the most
- Those with 25% (75% LTV) will be charged less, and
- Those with 40% (60% LTV) will be charged the least.”
Having understood how deposits work, these are other reasons why you need to put down a larger mortgage deposit.
Angie Mohr, a chartered accountant also gave several other reasons why it is better to put down a larger mortgage deposit in her Investopedia post. She cited the following reasons: Lower interest rate, reduced mortgage payments, no mortgage insurance fee, and lower risk when selling.
If you are looking to buy a house, it is to your advantage if you put down more than the minimum percentage required to access a mortgage.