In this brief blog, we are going to discuss Exchange deposit.
Before we discuss the exchange deposit we should define a mortgage deposit.
What is a mortgage deposit?
A mortgage deposit is an amount you pay upfront as part of your property purchase. The other amount is the mortgage you receive. Some of the mortgage deposit would be paid to the lender if it was more than the exchange deposit required by the seller. If it was the same then nothing will be paid.
If the mortgage deposit was less than the exchange deposit then nothing will be paid to the lender.
The minimum mortgage deposit is dictated by the mortgage lender as this determines how much mortgage they can give to you and subsequently the loan to value on the mortgage.
Not all buyers can fund their mortgage deposits themselves and there are now government schemes which can help you fund a mortgage deposit.
Example of a mortgage deposit:
“Mortgage deposit is how much the lender requires you to put down. Say if you bought at £400k and could put down £100k as a mortgage deposit and this was required by the mortgage lender then the mortgage deposit would be £100k, so the mortgage required would be £300k.
On exchange of contracts, you pay the exchange deposit, which would be 10% usually, so £40k, from your £100k.
On completion, the mortgage money would be drawn, and you’d pay the other £60k to the seller. These funds make the remaining 90% owed to complete.”
Aside from the mortgage deposit (the total upfront payment you are required to put down before getting a mortgage), there is the exchange deposit which is part of the mortgage deposit and essentially an amount required as a down payment to the seller for exchange of contracts to happen.
We will discuss the exchange deposit in more detail below.
What is an exchange deposit?
An exchange deposit is a down payment which you pay to the seller of the house to make the sale legally binding at the exchange of contracts. Typically home sellers will require 10% as the exchange deposit.
If the cash amount which you have for your mortgage deposit is less than 10% then you will want to negotiate with the seller to reduce the exchange deposit to 5% and the total balance outstanding of the property price can then be sent to the seller on completion.
This could be the case if your deposit is being funded by a government scheme and you will only receive it on completion.
If you have a cash deposit of 10% then you will simply pay this to the seller as their requested exchange deposit and then get a mortgage for the remaining 90%
If your mortgage deposit is 10% then you will usually want to reduce your exchange deposit to 5% by requesting this from the seller through your conveyancer. Most sellers will agree to this as they understand how things work.
In some cases, you may be selling your home at the same time you are buying one and the income you receive from your home could help you pay an exchange deposit if the funds required were more than the cash you had at hand.
If a seller negotiates a 5% exchange deposit although contractually it states 10% and you pull out of a home purchase after the exchange of contracts have been signed off then the seller could come after for the remaining 5% plus any costs related to doing so as well as any damages.
The exchange deposit is essentially the deposit the seller requires to exchange contracts with you.
The exchange deposit counts towards the mortgage deposit, so they are not duplicated.
Example of exchange deposit:
A property is for sale for £170,000
Exchange deposit is 10% at £17,000
Mortgage deposit is 5% at £8,500
In this case the seller is requesting 10% as the exchange deposit and your mortgage is for 95% of the property price.
If you have 10% the seller is requesting as an exchange deposit then you can pay the seller and then your conveyancer will return the 5% excess (£8,500) to you when they receive the mortgage funds( 95% of the property) on completion and only send the seller the remaining 90% balance for the property price.
If you don’t have the 10% exchange deposit the seller is requesting then you can negotiate it down to 5% and make this payment. Youwill then send the complete 95% mortgage to the seller.
Another alternative is what is known as a simultaneous exchange and completion.
This means you will exchange and complete (receive the mortgage funds) at the same time.
In a case where the seller requested a 10% exchange deposit and you only had 5% of the property price as your required mortgage deposit because you are getting a 95% mortgage you would simply pay your mortgage deposit and the 95% mortgage to the seller on the same day and hence not have to fund the 5% extra required by the seller as your exchange deposit as the mortgage from the bank has done so.
If you are still confused by an exchange deposit and mortgage deposit then let us know below.
How much deposit do you pay on exchange?
You will typically pay a 10% deposit on exchange of contracts but most sellers will negotiate this down to 5% if you don’t have the 10% and you can then pay the remaining 5% with the mortgage funds or government scheme funds.
Who holds the deposit on exchange of contracts?
The deposit is held by the seller’s conveyancer on the exchange of contracts as you would have had to pay your exchange deposit to them.
How quickly can you exchange contracts?
The exchange of contracts process could be done in as little as 1 week before completion but in some cases, you can even exchange contracts and complete on the same day.
Using a mortgage broker
You may want to consider using an independent mortgage broker to get your mortgage.
Mortgage brokers are important as they can access single person mortgage products from across the whole of the market in some cases. This could be over 11,000 mortgage products. This may have some advantages than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which single person mortgage products may be suitable for you.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle.
This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your remortgage is indeed a possibility before you make a full mortgage application.
Once you have found a home you want to buy or are satisfied with the mortgage offer for your remortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.
Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it, they will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.
In this brief blog, we discussed the Exchange deposit. If you have any questions or comments please let us know.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.