Having a 5% deposit is occurring more frequently due to the Government's Help to Buy Equity Loan scheme which supports first time buyers with a deposit of a minimum of 5% of the purchase price of the property. To pay for the rest of the property you'll need to get a 5% deposit mortgage; either a 95% mortgage (available through Help to Buy Mortgage Guarantee scheme until Dec 2016) or a 75% mortgage with the support of a 20% Help to Buy Equity Loan.
The catch however is that on a standard purchase the minimum deposit you need to pay is 10%, 5% more than you have saved. Read on to find out what you need to do so that you can exchange deposits on 5% instead of having to lose your first ever property based on not having a large enough deposit.
What is exchange of contracts?
When buying a home in England and Wales one of the most critical points in the conveyancing process is exchange of contracts; up until this time either buyer or seller can pull out for any reason. The standard terms of contract state:
"The buyer is to pay or send a deposit of 10 per cent of the purchase price no later than the date of the contract"
The payment of the deposit from the buyer to the seller, allows for the exchange of contracts to take place and then the balance of the purchase monies is paid on the day of completion (actually you pay it to your solicitor the day before completion so they have it ready to send first thing to the seller's solicitor on the day of completion). You can read this article to find out more - What and when you pay during conveyancing
What if you only have a 5 per cent deposit?
The standard terms are the same in all conveyancing contracts (and you can read them here) and form part of the legal agreement between the seller and the buyer. In order for you to use a 5 per cent deposit you must agree with the seller that they will be happy with this. To do this you must inform your solicitor that you are using a 5% deposit and they in turn must confirm with the seller's solicitor that they are happy to accept this.
You should raise that you only have a 5% deposit right at the outset as soon as you instruct your solicitor and never leave it to the point that you need to exchange - although most sellers agree to the lower deposit, some may feel that you haven't been upfront if you leave it to the last to tell them.
What if the seller doesn't agree?
Under normal circumstances the seller wouldn't need to worry if you didn't complete after exchange of contracts because their solicitor would be in receipt of the 10% deposit, so if you did pull out, their solicitor could simply transfer the deposit to the seller (if a buyer fails to complete after exchange then their 10% deposit is forfeit). The risk to the seller is that you fail to complete with only a 5% deposit then they'll have to start legal proceedings to recoup the balance of the 10% deposit.
Sadly if the seller is unwilling to accept a 5% deposit then you'll be unable to exchange and effectively you'll not be able to buy this property. It would be unlikely that a seller would decline a request to exchange with a lower deposit as you are still liable for the balance of the deposit if you fail to complete after exchange however make sure to inform the seller and your solicitor from the word go to get this agreed.
What happens if you fail to complete?
As we saw from above, if you fail to complete and only paid a 5% deposit on exchange of contracts then you will still be liable to pay the balance of the 10% deposit to the seller - plus a claim for damages. You can read more on this here - Can I pull out after exchange of contracts?
Under normal circumstances it is incredibly unlikely that you will be unable to complete after exchange of contracts because your solicitor will have confirmed you have the funding with a mortgage, processed the Help to Buy scheme paperwork and advised of the potential risks with buying the property from the information sourced through the process.
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