Applying for a mortgage is a huge moment in the life of an individual or a couple, and often is something of a rite of passage for people who are about to embark on a whole new journey, where full financial independence and responsibility is taken on.
Even if you’re someone who already owns a home and are looking to invest in property or become a landlord, the world of mortgages is one which is fairly complex and the rules and regulations regarding how mortgages can work, and the deal that can be offered to customers are very strict and subject to a lot of oversight.
There is also the myth that you can get a better mortgage if you have a large deposit to lay down.
However this isn’t the only thing that’s important when it comes to applying for a mortgage, and your whole financial situation will be looked into in quite graphic detail, with everything from debts and loans to incomes and savings being looked at before a lender will make a final decision about whether to lend to you.
Generally speaking, banks and lenders consider a deposit of around 20% or more to be a large deposit. Obviously, as a percentage this means that this amount can vary quite widely depending on the size of the mortgage you’re applying for.
Naturally a 20% deposit on a modest condo or apartment will be far smaller than a 20% deposit on a huge place in a desirable location.
However regardless of your ambitions and the cost of your ideal home, the deposit is a giveaway to lenders as it’s usually an indicator of how you’ve been able to save and your purchasing power, which also tells them a little about how much of a risk you are as a buyer.
While a large deposit can get your access to lower rates and more favorable deals, there are other very important factors to securing a good loan deal, and these are far less well known than simply saving up a large deposit.
While many people fantasize about saving tens of thousands of dollars and buying their dream home without a hitch, the truth is that there’s much more to it than this.
One of the biggest factors that will determine your mortgage deal isn’t just the money you’ve managed to save, but your job history and income as well as your current income and profession.
These tell lenders how likely you’ll be to continue making payments on your mortgage once the deal is done, and how reliable you’ll be as a lender.
Naturally, lenders want to avoid more high risk customers, or offer much less favorable deals to protect their interests from the perceived danger of risky customers.
Having a slightly smaller deposit, but a very solid profession in a reliable industry and with a good payment package can sometimes result in a better mortgage deal than trying to get a deal with a substantial deposit and a less reliable career such as freelancing for example.
Despite the fact that you’ve managed to save money, the instability of your work situation can make you a much riskier lender and will mean that you won’t get access to the better deals.
While this may seem unfair, it’s a system that’s designed to ensure that banks and lenders are exposed to as little risk as possible, which makes sense given the huge amounts of money that are at stake for both parties.
Banks have some level of responsibility in making sure that they are making financially sound deals while also preventing people from getting themselves into potentially life changing debt.
Making a large deposit or having a lot of money saved can have a big impact on the deal you get for your mortgage, and one of the big appeals of this strategy is that doing so can potentially cut or severely reduce the amount of interest that you pay on your mortgage, and allows you to gain equity on your home faster and earlier than simply relying on the lender to provide most of the capital.
However a large deposit can have adverse effects on your mortgage, particularly if you can’t explain to your broker where you got the money from, or are using loans or side gigs to save the money.
Oftentimes a large unexplained deposit into your bank account will cause a lot of red flags and draw interest from both your bank and your proposed mortgage lender, as both parties will want to verify you came across the money legally.
Being able to explain how you managed to save up a large deposit, and provide proof of this as well as for any incoming large sums of money that enter your bank account during the application process is very important to make sure your mortgage application isn’t slowed down or rejected out of hand.
Keeping track of your finances closely and making sure any and all income is properly declared and recorded is the best way to ensure stability during this process and handle any concerns that may arise during this process.
While getting on the property ladder has become very difficult for first time buyers due to a variety of economic factors, there are options available to buyers who aren’t able to save up large deposits.
Some lenders will consider opening up equity from homes of parents or significant others as a means to back your mortgage deal and provide more of an assurance to the bank, however this of course comes with risks of its own for the guarantors, and can have huge personal and emotional impacts on everyone involved, so deals like this should never be taken lightly and all parties should have proper arrangements in place if this is the route you want to take.