BISCOES: Becoming a home owner

Buying your first home – What’s the difference between your mortgage deposit and your exchange deposit?

When preparing to buy your first home, you’ll usually save up a sum of money to use alongside your mortgage. The sum that you save is generally referred to as your mortgage deposit.

On the day you exchange contracts to buy your home, you’ll hand over 10 per cent of the purchase price to the seller (or a smaller sum if agreed). The agreed deposit amount is set out in the Contract for Sale that you and the Seller sign. This sum is called your exchange deposit.

These two sums of money are not (quite!) the same and this often causes confusion, especially for our first-time buyer clients.

The easiest way to think about it, is that your mortgage deposit is the total cash investment you are making towards the purchase.

It’s the amount you are contributing alongside your mortgage to make up the total cost of your new home; your mortgage deposit will be the equity you will own in your home.

Your exchange deposit is transferred by your solicitor to the seller’s solicitor when you exchange contracts. This is when the contract to buy the property becomes legally binding and, if either party should back out after exchange, there may be financial penalties.

The good news is that your exchange deposit is usually part (or all) of your mortgage deposit, so you don’t need two deposits.

If you are buying with a Help to Buy ISA (HTB ISA) it’s important to understand the 25 per cent Government bonus is only paid after completion, which means it can’t be used for your exchange deposit. As the HTB ISA Scheme is now closed to new applicants; the replacement, being a Lifetime ISA (LISA), is an even more effective way to save for a deposit. A LISA lets you save up to £4,000 per year with a 25 per cent bonus paid at the end of each year. This bonus can be used as part of your exchange deposit.

If you would like to speak to a member of our Residential Property team about buying your first home, please contact us on 01983 533938.