What’s the difference between a mortgage deposit and an exchange deposit?

When preparing to buy your first home, you’ll usually save up a sum of money to use alongside your mortgage. People call this process ‘Saving up your deposit’, and the sum that you save is generally referred to as your mortgage deposit.

But on the day you exchange contracts to buy your home, you’ll hand over 10% of the property value in cash to your seller’s solicitor. This sum is called your exchange deposit.

These two sums of money are not (quite) the same! This awkward distinction is the source of much confusion among first-time buyers especially. Here we explain the difference – and why it matters.

Mortgage deposit vs exchange deposit

Your mortgage deposit is probably what you think of as your deposit. It’s the amount you’re putting alongside your mortgage to make up the total cost of your new home. The bigger your deposit in relation to your mortgage, the lower loan-to-value ratio you have, and so the better mortgage deal you’re likely to get.

However – your mortgage deposit is not really a ‘deposit’ in the true sense of the word! It’s simply the money that will turn into equity, i.e. the portion of your home that you’ll own outright and mortgage-free.

Your exchange deposit, on the other hand, really is a deposit. Your solicitor transfers it to your seller’s solicitor when you exchange contracts on the sale. This is known as the ‘point of no return’, in that if you back out of the purchase now, you will lose that money.

Your exchange deposit is typically 10% of the property price. Occasionally you may agree a lower sum with your seller, and sometimes they may insist on more.

So do I need to save up two deposits?

The good news is that your exchange deposit is usually part of your mortgage deposit (and often all of it). So no, you don’t need two deposits. The main reason they are referred to separately is that they have different functions: a mortgage deposit affects your mortgage deal, while an exchange deposit is used when you exchange contracts. Also, a mortgage deposit may be a lot bigger than an exchange deposit, so you only use part of it when you exchange.

There are also some other reasons, such as the rules surrounding Help to Buy ISAs, which we’ll cover below.

Mortgage deposit and exchange deposit - example

Max is buying a house for £200,000 with 20% in cash (£40,000) and an 80% mortgage of £160,000. His mortgage deposit is £40,000, but he only needs a 10% exchange deposit. So he hands over half of his mortgage deposit (£20,000) when contracts are exchanged. A couple of weeks later, on completion day, he pays the remaining £20,000 while his mortgage lender releases the £160,000 loan of his mortgage.

What if I’m not a first-time buyer? Do I still have an exchange deposit?

If you’re selling one home to buy your next home, you may not have the spare cash to pay an exchange deposit. In most cases, this money will be tied up in the equity of your current home. Where this is the case, the process involves a bit more conveyancing magic. Here’s how it works.

How an exchange deposit moves up the chain

Here’s an example of how the exchange deposit process works if you’re both selling and buying.

Max, the first-time buyer, is buying Helen’s £200,000 house. Helen is buying a house from Rajesh for £250,000. Rajesh isn’t going to buy another property yet – he’ll move into rented accommodation – so the chain stops there.

On exchange day, Max’s solicitor transfers his £20,000 exchange deposit to Helen’s solicitor. So where does Helen’s exchange deposit come from? That’s the clever part. Her solicitor can use this same money as her deposit. Although the money itself will stay with Helen’s solicitor, this is enough to provide the security to allow her purchase to go ahead.

However, there is a small snag. Max’s exchange deposit is only £20,000 (i.e. 10% of £200,000). But Helen is buying a £250,000 house, so doesn’t she need a £25,000 exchange deposit? The answer is, she might. She (or her solicitor) could talk to Rajesh and try to agree a lower deposit, but Rajesh has the right to insist on the full 10%. If he does, then Helen will have to find an additional £5,000 in cash to make up her full exchange deposit. However, Rajesh may prefer to agree to a lower deposit rather than see the chain potentially collapse.

On completion day, Max’s solicitor transfers the remaining monies for his purchase to Helen’s solicitor: the mortgage money of £160,000 and the rest of the mortgage deposit (£20,000). This makes a grand total of £200,000 and so completes Max’s purchase.

Now, at last, Helen’s solicitor can transfer the £20,000 exchange deposit on to Rajesh’s solicitor (along with Helen’s equity and new mortgage). This is the deposit ‘moving up the chain’. If there were even more buyers in the chain, the exchange deposit would continue moving up in this way until the last property purchase completes.

What happens if the exchange deposit isn’t enough?

As shown in the example of Max, Helen and Rajesh, the first-time buyer’s exchange deposit may not be enough to cover the purchases higher up the chain. This leaves those buyers with two options:

• Find some extra cash from somewhere (e.g. savings or a loan)
• Negotiate a lower exchange deposit

If the difference is only small, negotiating a lower deposit is often achievable. However, the lower the exchange deposit, the higher the risk for the seller – so bear this in mind if your buyer is asking you to accept a lower deposit. A 10% deposit is good protection for you (as seller) against your buyer backing out.

Can my Help to Buy ISA cover my exchange deposit?

If you’ve saved up to buy your first home using a Help to Buy ISA, then it’s important to understand the difference between a mortgage deposit and the exchange deposit. A Help to Buy ISA adds a 25% bonus to your savings when you complete the purchase of your first home – but this detail has caught out many first-time buyers. The 25% bonus is only paid after completion, which means it can’t be used for your exchange deposit (though the rest of your Help to Buy ISA savings can be). Here’s an example.

Jane’s first home will cost £150,000 so she needs a 10% exchange deposit of £15,000. She has saved up the maximum £12,000 in her Help to Buy ISA, which the 25% bonus will boost to £15,000 – but only when her purchase completes. This means she can use the £12,000 for her exchange deposit, but must find the extra £3,000 from somewhere else in the meantime (or persuade her buyer to accept a lower deposit). She should be able to get a short-term loan (perhaps even from family) given that she will be able to pay it back as soon as the purchase completes.

What if I use a Lifetime ISA?

The Help to Buy ISA is now closed to new applicants (though existing savers can continue to use them until 1 December 2030). However, there is a replacement product that is an even more effective way to save for a deposit. A Lifetime ISA (LISA) lets you save up to £4,000 per year with a 25% bonus paid at the end of each year (i.e. a maximum of £1,000). This means you can use this bonus as part of your exchange deposit, as you will already have it. This product is available in the form of a stocks and shares LISA and a cash LISA.

The downside is that if you withdraw money from a LISA before the age of 60 for any reason other than buying a first home, you will pay a 25 per cent penalty on the money.

Can I lose my exchange deposit?

Once you pay your exchange deposit, you’re legally bound to go ahead with the property purchase. That means you’ll lose your deposit if you decide to back out. Conversely if your seller backs out, you’ll get the exchange deposit back (and should be able to sue them for any costs or inconvenience incurred in the process).

Similarly, if your buyer pulls out, you get to keep their exchange deposit. However, you may have to pass it straight on to your seller, since you are unlikely to be able to go ahead with your own purchase.

What are the alternatives to using an exchange deposit?

In some circumstances, you may face difficulties in finding an exchange deposit.

For example, if you are using a 100% mortgage that requires no mortgage deposit (e.g. a guarantor mortgage), then presumably you don’t have any savings you can use for an exchange deposit. Similarly, you might have a 95% mortgage with a 5% mortgage deposit, which isn’t enough to cover the exchange deposit.

Also (as mentioned above) you might be a seller and a buyer, and your own buyer’s exchange deposit isn’t enough to cover 10% of the property you’re buying.

In these circumstances, your alternatives are:

• Ask your guarantor (if applicable) to cover the exchange deposit
• Borrow the money off another family member
• Take out a bridging loan for the extra money (but beware of high interest rates)
• Negotiate a lower exchange deposit

Like many aspects of the home buying process, the two kinds of deposit can cause some confusion at first. Your mortgage broker can answer your queries at any stage, as well as finding you the best value deal.