Why a 10% deposit is required to buy off-plan
Hey guys,
One of the biggest challenges a property club face is the need for sales versus the need to fully inform clients and most of the clubs around have opted for sales over education and information.
The reason I raise this issue is that a lot of clubs in their drive to sell neglect to fully inform clients of the risks involved with exchanging on property. Yes – it is always the buyer’s responsibility to perform due diligence, but many clubs assume that their clients have a much higher level of knowledge than they actually do.
The complications come once you exchange on a property as you are legally bound to complete it whether you can get a mortgage or not. Putting aside the issue of not being able to get a mortgage, the next biggest issue is arriving a completion and not having enough money to complete.
That’s why I always have my clients put in 10% on exchange so that they know they can at least complete on the property. Let me explain:
If you invest 10% at the time of exchange you will have no problems (eg: shortage of funds) when it comes time to complete. The reason is quite simple. All funders require a minimum 15% deposit on a buy to let property. Almost all funders will allow a 5% builder’s gift as part of your deposit when buying direct from the builder. So this leaves you 10% as the deposit you must find. Given this criteria it shouldn’t matter when your property completes, you will be able to get a mortgage and more importantly complete on your property. That’s the only proviso.
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Too many times I have had people come to me having exchanged on a property with nothing down or 5% and when completion arrives they don’t have the required funds and lose the property. A lot of times this is due to being sold a no money down deal which was available at the time but by the time that the property completes it is no longer available and because they have exchanged so must they complete.
This means that you haven’t got 10% you possibly shouldn’t exchange on it.
Brett’s 85% LTV versus rent assumption
The only other factor which I have not discussed in this section is the rental achieved by the property and its effect on the amount you can borrow. My assumption and certainly my experience is that if you leverage to 85% you will be able to find a funder that will lend you the money. After all the funders want your business.
Live with passion,
Brett Wood
