Property purchase: use your deposit sparingly!
Do you have a significant deposit for a property purchase? Keep in mind that retaining some of this sum may prove useful in future and that a substantial deposit is not a requirement for banks.
You are about to acquire a new home and have a sum of money that you intend to use as a deposit. This is a good idea and the deposit is an important asset in obtaining a mortgage. Nevertheless, keep in mind that retaining some of this sum may prove useful in future and that a substantial deposit is not a requirement for banks.
Adapt to the usual borrowing rules
With a normal situation – one or two people on permanent contracts requesting a mortgage – a suitable deposit is considered to be 10% of the amount borrowed. This serves to reassure the bank about the ability to save, and the deposit also provides security covering the costs incurred when purchasing a property: notary fees, arrangement fees, and so on.
In such a framework, the only valid reason for increasing the deposit beyond 10% is to comply with the permitted debt-to-income ratio. If the purchase amount is significant, the monthly payments could push you beyond the 35% debt level recommended by the High Council for Financial Stability (HCSF). The consequence is the risk of refusal from lenders. Reducing the amount borrowed through the deposit then becomes necessary.
Keep a safety savings buffer
From the moment you are able to purchase the house or flat while retaining cash, it is wise to do so. The first reason is to build up savings against life’s unexpected events or to meet other future desires. Sacrificing your savings to save a few pounds on monthly payments is not necessary most of the time.
Furthermore, you have the possibility of investing this money so that it earns interest for you. Spending more on your property will not increase its intrinsic value or the capital gain you can make when reselling it. The gain from interest if you minimise the borrowing may prove marginal compared with the comfort that available or invested savings will give you. The calculation needs to be made on a case-by-case basis.
Finally, in preparation for retirement, savings can supplement a pension that is insufficient to meet your needs. The earlier you save, the better.
Finance significant expenses without using credit
While it enables many projects to be unlocked, credit is expensive and it is wise to avoid it as much as possible. Certainly unavoidable in most cases when acquiring a property, other projects will be accessible without paying interest, provided you have been foresightful.
Notably following the purchase of your home, it may require unexpected work or work encouraged by your life there. Renovations, refurbishment work or replacement of expensive appliances such as the boiler or hot water tank can strain the finances.
You may also want to equip yourself with furniture suited to the living space or decoration.
Finally, if you own a car, you will readily agree that it is better to have a rainy-day fund to cover possible breakdowns. Parents may wish to cover the cost of their children’s education well in advance. And invested savings earns money!
The reasons for building up savings are numerous and everyone will find one. The property deposit should be calculated as precisely as possible to facilitate the purchase while retaining the ability to finance other elements according to your needs or desires. To be certain of success, use a broker or your estate agent who will guide you through your banking procedures.
