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I live and work in the UK, and am starting to look seriously into buying my first house. I have thought about looking to buy a few times over the last few years, but ended up deciding not to for various reasons.

Having had a cursory look at properties on rightmove, just to get an idea of what's available, and roughly how much a property that fits my requirements is currently being sold for, I then had a quick look into mortgages, to see how much I could afford to borrow. The Loan-To-Value rate I was quoted at one mortgage broker was roughly 65% (for a property at the upper end of what I had looked at).

What I'm unsure about, is how to decide how much I should stump up for a deposit towards a property... According to an article on Which?, (July 2019), you'd need at least a 5% deposit to get a mortgage in the current market, but the average deposit in the first half of 2018 for first time buyers was 16% of the property value.

I am in the fortunate position of having been able to save a large percentage of what I've earnt for a good few years now, and could realistically put up to ~40% of the property value down as a deposit (for properties at the higher end of what I'm looking at)- which ties in with the LTV rate I have been quoted.

But since this is at the higher end of the value of properties I am looking at, I obviously could consider some cheaper properties, for which the deposit value I have would be a greater percentage.

All of this is obviously while ensuring that I have something set aside as a 'rainy day fund'.

How can I decide what my budget should be? What are the factors I should be considering in this decision process?

mhoran_psprep
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Noble-Surfer
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    In the US, a deposit is typically put down with a Purchase and Sales agreement with the seller. The purchase price is then the closing costs with the bank & realtors, the down payment towards the property, and the balance coming from the mortgage. Here we also see PMI, Private Mortgage Insurance, if the deposit+downpayment is less than 20% of the appraised house value. Some banks also require 6 months of property taxes to be on hand while the mortgage is active; it varies for first time buyers and the bank. – CrossRoads Jan 22 '20 at 17:43
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    I would go with a 20% down payment and keep the rest in reserve. Once you've lived in the house for a year or two then you will have a much better understanding of your monthly financial picture and then you can decide how to use the other 20%. You can apply it against your principal or get yourself a nice shed/garage/driveway/etc... Having a financial cushion is always a good idea as you don't want to end up house-poor or become financially unstable due to a major expense such as job loss or new roof. – MonkeyZeus Jan 22 '20 at 18:15
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    40% is a very respectable number, well done on saving up that much! As a recent buyer myself, I'd like to remind you that there are a plethora of fees and taxes that you need to pay upfront that cannot come from the mortgage itself. Stamp duty, solicitor fees, search fees and survey fees immediately come to mind, these can easily go into 5 figures total. You would be well advised to leave room for this, as well as any repairs or redecoration you might want to do after you move in, and have enough for a potential annual service charge (if it's a flat). – Ordous Jan 23 '20 at 00:13
  • @Ordous Yup. I don't know what the amounts are for the UK, but around here it's roughly 6% of the sum to keep in mind. – Mast Jan 23 '20 at 08:46
  • @Ordous Thanks for the comment- I absolutely agree, 40% is the value I have managed to save, but given there are likely going to be signinificant fees & taxes, and potentially redecorating/ repairs to pay for, it's highly unlikely that I will be able to use the full 40% for the actual deposit... maybe 20% is more realistic on that front, to give myself some flexibility for the additional costs. – Noble-Surfer Jan 23 '20 at 15:19

7 Answers7

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As much as you can reasonably afford

As long as you still have an emergency fund(which you noted you will have) then its always a good idea to put down as much as you can afford for the deposit.

The more you put down now the less time repayments will take or the less the monthly outgoing will be. The higher monthly payments you can afford the shorter the mortgage will be. The main goal is to reduce the length of your mortgage as much as possible and pay it off in the shortest time so that you pay less interest.

Thomas
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GamerGypps
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    Never forget the opportunity costs of your capital. It might make more sense to invest somewhere else. – Thomas Jan 22 '20 at 10:12
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    This sounds like a sensible approach to me- and had been what I was leaning towards anyway. I try to avoid loans/ debt wherever possible, as you always end up paying more than you actually borrow. My only other current debt is my student loan... In an ideal world, you wouldn't have to take out a mortgage to be able to afford a house... – Noble-Surfer Jan 22 '20 at 10:35
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    @Noble-Surfer One day we can hope that will be the case.. – GamerGypps Jan 22 '20 at 14:53
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    @Noble-Surfer definitely remember, if the interest rate is lower on your mortgage than on your student loan, you should consider paying that down first. They're both debts, and you should always pay down the higher interest ones first! – bracec Jan 22 '20 at 19:47
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    @Thomas If your house was paid for would you take out a mortgage against it so you could go invest the money elsewhere? I think most people would answer no, because what is usually overlooked when talking about the opportunity cost of capital is the inherent risk in having outstanding debt. I would argue that to keep a mortgage so as to leverage the capital in some other investment would be unwise for most people and foolish for the rest. – ARich Jan 22 '20 at 20:21
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    @Thomas, I agree with ARich. Having a low to non-existent debt on a house is far more favorable for the mind and credit score than high debt and high risk on an investment. If the investment fails or you cease to be able to make a house payment, you get in real problems real fast. Risk is generally best done 1 thing at a time, not when multiple risks depend on each other like a ring of dominoes, where if one falls they all fall. – computercarguy Jan 22 '20 at 20:34
  • As good as this advice is, it's also really generic, to the point where it's not even really an answer. If you gave examples of what the OP would need the emergency fund for as well as what kind of costs they should expect during the move (such as repairs and furniture), it would greatly improve this answer. – computercarguy Jan 22 '20 at 20:37
  • Don't go alone. Get the advice of a 'fiduciary' planner. They can help you make wise use of your money. – Arluin Jan 22 '20 at 21:25
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    @Arluin The scenario you describe is exactly what I would (and do) do. In a market where you believe the long term combined rent + capital gains will be higher than the interest rate, it does not make sense to avoid debt. Plus don't underestimate the power of inflation to eat away at your mortgage capital in the long run. Granted that this particular risk/reward ratio might not be for everyone, but I think it is a leap to say that "most people would answer no" - at least that certainly wouldn't be true among buy to let landlords. – JBentley Jan 22 '20 at 22:40
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    @bracec the student loan in the U.K. is written off 30 years after graduation so, except for very high earners, it rarely makes sense to pay it off early (despite the very high interest rate). The minimum amount paid towards it is automatically taken from salary, exactly as taxes are. – Tim Jan 23 '20 at 01:06
  • @bracec Depending on the mortgage, it may be possible to borrow enough on the mortgage to clear the student loan, and then have one debt. Downside, some student loans cost less than the mortgage. – Criggie Jan 23 '20 at 02:38
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    @bracec Student loans are an exception to that in the UK, because they are only paid back as a percentage of salary - in particular, if you lose your job you are no longer required to make payments until you are earning again (in which case, having a large student loan and small mortgage would be much better, even if student loan interest is higher). And, as they eventually get written off, many people will never pay them off (so essentially just be paying an extra percentage tax for a while), in which case the interest rate is irrelevant. – meta Jan 23 '20 at 10:06
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    @Criggie - Bearing in mind the way that UK student loans work (Hint - they are not really loans) taking out a mortgage to pay it off is a totally terrible idea and if a financial adviser tried to suggest this then they would probably be struck off the register and lose their licence to practice. – uɐɪ Jan 23 '20 at 11:14
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    @uɐɪ, good thing I'm not a financial adviser in the UK, then! I didn't realize student loans worked differently in the UK - thanks for correcting my America-centric response, everyone! – bracec Jan 23 '20 at 17:39
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    This is a ridiculous top rated answer. You should put as little as you can get away with! A mortgage is one of the least liquid assets you can get, and mortgage rates are very, very low right now. – corsiKa Jan 23 '20 at 21:41
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    @ARich "to leverage the capital in some other investment would be unwise for most people and foolish for the rest" This contradicts the published research that suggests that you should be maximally leveraged when you're young. – Neil G Jan 24 '20 at 10:17
  • @Thomas Where would it make more sense? If you know of somewhere you can get a risk-free investment with a higher guaranteed rate of return than the interest rate on a mortgage, please share it! – Mason Wheeler Jan 24 '20 at 15:21
  • @ARich Maintaining mortgages on expensive properties is exactly what all he ultra-rich folks in the US do (sorry, no citation). If you borrowed money against your house in January 2019 at 2.5% and invested that money in DJIA-tracking fund, you would have made ~24% return on that investment during 2019, coming out ahead. The reason "normal" people don't do this is that they cannot afford the consequences of a loss on the open market. – Christopher Schultz Jan 24 '20 at 16:22
  • @NeilG The published research is theoretical, and also does not account for the type of risk I mentioned before. Sure, if everything in life always goes according to plan then yeah, take out loans until the cows come home and laugh all the way to the bank. But layoffs happen, accidents happen, relationships go sour, etc, etc. leveraged positions are considered very risky for a reason: life doesn’t always go according to plan. – ARich Jan 25 '20 at 00:38
  • @corsiKa I would be interested to hear your reasoning why you think putting in as little as you can is better advice than putting in as much as you can- I get that a mortgage is not easily liquidated, and that mortgage rates are low right now- but that is sort of the point- they're low right now. There's no guarantee of how long they'll remain low. Would you mind posting your reasoning for this in full, as an answer? It would be good to have an alternative answer there, as this is the sort of question which different people will answer differently. – Noble-Surfer Feb 19 '20 at 08:01
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The question you really need to answer is: What else could I do with the money?

Consider that you may need to furnish the house, or you may want to improve or remodel it, and you should reserve some funds to do that.

You also need to consider how the down payment affects the transaction. For example, you will most likely get a better interest rate with 20% down than you will with 10%. Or, in the US, less that 20% down typically adds a requirement for PMI, which is an additional insurance payment you have to make every month. Generally speaking, the bigger the down payment, the smoother the transaction will be, and it will cost you less, certainly in the long run.

If you don't have any needs, wants, or goals, then I agree that you should put down as much as you can reasonably afford.

Mohair
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    I think that this answer touches on something that others have ignored, and which should be highlighted: buying a property induces extra costs! Moving costs, reparations/preparations costs (change of flooring, new insulation, new HVAC, ...), furnishing costs. Furthermore, owning a property also affects the "emergency fund": the emergency fund now needs to account for repairs/maintenance of the property. This needs to be taken into account to avoid being tapped for cash after putting the down-payment, as well as when computing the monthly mortgage payments. – Matthieu M. Jan 23 '20 at 16:14
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    The UK doesn't have the concept of PMI. Instead it's all in the interest rate. Banks will offer a range of mortgages, each with a maximum Loan to Value (LTV). The best rates will be offered at 60% LTV (i.e. 40% deposit, 60% mortgage). – thelem Jan 23 '20 at 16:44
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Well besides that usually the money percentage you put down influences the interest rate (the more you put down the cheaper interest you get) you should consider the opportunity cost.

This means if you recieve a higher interest on an investment than the rate of the mortgage it makes more sense to invest and have a higher mortgage.

Thomas
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    Maybe I should have said specifically in my OP, but the primary purpose of looking to buy is to own the place where I live (as I did mention- this will be my first property). I am not (primarily) looking at this as an investment- I am aware that it 'is' an investment, because house prices fluctuate, but my reasons for not going ahead when previously looking were because I was not at the stage in life where I wanted to set down roots. I am now- which is why I am now looking more seriously at buying. I don't do any self-managed investing, so would not be looking to balance mortgage v investment. – Noble-Surfer Jan 22 '20 at 10:23
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    This isn’t necessarily true, because you pay income tax on returns from investments (if not in a tax-free wrapper like an ISA or pension), whereas you don’t pay tax on reducing the size of your mortgage interest payments. Paying down your mortgage is a very tax-efficient way to save. – Mike Scott Jan 22 '20 at 11:16
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    The only investments I do currently have are tax free ones (ISA & a few pensions). I am aware that paying doesn your mortgage is a very tax-efficient way to save, but as I don't currently have a mortgage, it's not an option at the moment. With interest rates being so low at the moment, it seems very unlikely that I'm going to be able to get a higher interest rate on savings than mortgage rate at the moment.... – Noble-Surfer Jan 22 '20 at 14:27
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    This answer is misleading because the calculation of subtracting investment returns from interest rates on the mortgage does not include the crucial third piece of the puzzle: risk. Once you introduce risk into the equation the potential gains from other investments are negligible at best. Debt has inherent risk and investment returns are never guaranteed. – ARich Jan 22 '20 at 20:27
  • @Noble-Surfer This doesn't make sense: "With interest rates being so low at the moment, it seems very unlikely that I'm going to be able to get a higher interest rate on savings than mortgage rate at the moment". The competing interest-bearing investment is not a savings account; it's equities. Depending on your age and risk-tolerance, you should be considering real returns of 4–7%. – Neil G Jan 23 '20 at 08:56
  • @NeilG I appreciate that you can get much higher returns on investments- however, that requires some knowledge/ experience/ time to research your investments- I don't feel I have sufficient of any of these to be doing my own investments- which is why the only ones I have are in ISAs & pensions where the investments are handled by the provider. – Noble-Surfer Jan 23 '20 at 13:17
  • @Noble-Surfer It really doesn't require any knowledge. A lot has been written and said about index investing, but here's a decent podcast with the very recently deceased John Bogle, father of ETFs. Here's a pithy argument for ETFs. – Neil G Jan 23 '20 at 13:52
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    @Noble-Surfer You might not be trying to look at it as an investment, but essentially any action (especially pertaining to financial matters) is a form of investing, since it has an opportunity cost and some kind of return. – Dan Mandel Jan 23 '20 at 21:42
  • @ARich - your statement regarding risk is off. Interest rate is (used to be before 2008) a messeaurement for risk. The higher the risk the higher the interest rate – Thomas Jan 25 '20 at 08:47
  • @DanMandel As I mentioned in my first comment on this answer- I am aware that it is an investment, but I am not approaching buying a house with financial investment as my main objective. It's actually not an objective at all- the investment side of it is more of a 'risk aversion' exercise for me. Contrary to what the media/ banks/ etc want us to believe, money is not the primary focus. The investment for me in this is in my & my family's future- owning a property to live in, rather than paying rent, which is just dead money, and not an investment of any sort. – Noble-Surfer Jan 27 '20 at 11:00
  • @Noble-Surfer You're framing that a little wrong. The fact that you see owning as better than rent means that you're recognizing that rent is a poor investment (depending on the location). In other words, you're currently trying to better your investment, you're just not realizing it. If you claim it's for your family's future, that implies that you're doing it for your family's economic benefit, or some sort of emotional benefit. Your emotional benefit can offset some of the economic benefit, but in the end, this is nothing more than an economic exchange. – Mars Jan 31 '20 at 05:16
  • If you live in an area where it's better financially to rent (at least at the moment), then if you were really doing it "for your family," it may be better to rent a satisfactory place and just throw the money into a rather risk-free savings account. Homes and mortgages are of course not risk free. Things can go wrong, property values can go down, etc, so even a primary residence home is still an investment. You might think "oh, if I have a home, then at least if i lose my job, i'll still have a place to live." But if you lose your job, the freedom to downsize (move) and the big bank account – Mars Jan 31 '20 at 05:19
  • full of cash will likely help you much more than a roof over your head – Mars Jan 31 '20 at 05:21
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    @ARich I believe having a home and losing your job can be worse than having the same amount of money in a bank and losing your job. Home ownership can make things worse – Mars Jan 31 '20 at 05:23
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I would like to extend @Mohair's answer.

A mortgage is a very cheap credit. Current interest rates in the UK seem to be around 1.5% (plus setup fees). Could you make more than 1.5% if you invest that money elsewhere (stocks, funds...)?

If you use a tax-sheltered vehicle like an ISA, you could potentially be better off by paying a small deposit and placing the rest of your savings in a high-return fund.

Of course, there are many factors to take into account like risk, psychological safety, etc. Some people prefer to pay off their mortgage ASAP even when it's not the most financially sensible option.

mkorman
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  • If this were good advice for many people, we would expect to see people willing to remortgage their house to invest that money in the hopes of beating the mortgage interest. But, apart from investing in one’s own business, I don’t think we see this happen. It feels like a risky trade for not a great reward to me, but maybe I’m wrong and actually the reason no one does that is because of tax or banks being unwilling or something else – Dan Robertson Jan 24 '20 at 22:18
  • @DanRobertson I'm not advocating remortgaging. I think there is value in reducing your risk pay your mortgage off eventually. What I'm advocating is not overpaying. If you're in a comfortable position where you can pay your mortgage regularly and build some savings, invest instead of overpaying. The decision is always up to you. So far it's worked well for me. – mkorman Jan 25 '20 at 13:41
  • in some sense these are equivalent: 1. Have $100k, put down a $50k down payment to buy a $100k house (ie borrow $50k for the mortgage), and invest the other $50k in whatever; 2. Have a $100k house, remortgage it for $50k and invest that in whatever. In both cases you end up in the same situation: owning a house with 50% of its value mortgaged, and $50k invested into whatever. But I often see the transition in case 1 advocated for online but not case 2, even though they are equivalent (note I’m ignoring fees associated with buying a house here). Buying for $100k moves you to from 1 to2 – Dan Robertson Jan 25 '20 at 14:39
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In the US and likely most other parts of the world real estate is expensive to transact. So in this case, it is best to find a home that meets your needs now and your anticipated needs in the future. You do not want to purchase a home today, that is a lower price, only to upgrade a short time later. Since you can afford it, buy the upgrade now.

So to me, your primary focus should be on the home that will meet your needs.

Next, and it really is liberating, the best way to buy a home is with the 100% down plan. As you state, the most you can realistically cover is 40%, so I would should for at least 20% and possibly more while retaining a good emergency fund.

Pete B.
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    The UK is one of the cheaper countries for transaction costs. A typical first-time buyer will pay no tax or agent fees, and maybe £2,000 for legal fees and moving costs. Then they’ll pay agent fees of around 1% or slightly more when they come to sell. – Mike Scott Jan 22 '20 at 19:16
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    This advice may suit the US, but the buyer is in the UK. – Jack Aidley Jan 23 '20 at 11:32
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I'm going to disagree with everyone here and say the opposite.

You should put as little as you can into a deposit without incurring extra fees

Extra fees could be in the form of mortgage insurance, higher interest rates etc.

Put as little as you can into your deposit and then make sure you have an offset account to put the rest of your money.

The reason for that is money you put towards your deposit gets locked in - you can't easily take it out again without re-financing.

The money in your offset account will still offset your interest just the same but you can freely withdraw from it. It also serves as a rainy day fund if you lose your job or have a period of no income, because you can withdraw from the offset for a while.

Joe.E
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    This is only applicable if the OP gets an offset mortgage, which is an extremely small proportion of the UK mortgage market. Getting an offset mortgage may mean a higher interest rate. – AndyT Jan 24 '20 at 10:42
  • This would still be applicable without the offset mortgage. It is not too difficult to make 1.5% out of your savings, and they are more liquid than invested in a property. – mkorman Jan 25 '20 at 18:10
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Think also about the cashflow. What will happen if you lose your lucrative job?

Best is to make a down-payment to a house in which you will still want to live in 10 years, and which still leaves you with reasonable emergency fund (fix home issues, unemployment, health etc). Then, get 15 or 30 year FIXED mortgage (no surprises) which you can easily afford to pay, and pay as much as you can early (aim to pay it down in 10 years if you can).

Peter M. - stands for Monica
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    15 or 30 year fixed mortgages don't exist in the UK. – AndyT Jan 24 '20 at 10:43
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    I think the advice still stands with a 5 year fixed mortgage. It's good to keep an emergency fund and not invest all your money in the house. – mkorman Jan 25 '20 at 18:10