There’s nothing quite like getting the keys to your first home, but if you’re dreaming of getting onto the property ladder, first things first – you’ll need to build up a suitable deposit. This is essential if you want to be accepted for a mortgage and it also determines the kind of home you can afford, so here, we outline how to save for a house deposit, helping to bring your dream of homeownership one step closer to reality.
This depends on the value of the home you’re looking to buy. The vast majority of mortgages require a deposit of at least 5%, which means if your ideal property is worth £150,000, you’d need a minimum deposit of £7,500. (Note that there are some 100% loan-to-value/LTV mortgages available where you’ll be lent the full value of the property without needing to put down a deposit, but these are few and far between and normally require additional guarantors.)
However, although it’s possible to secure a mortgage with a 5% deposit – you can find the best 95% LTV mortgages here – bear in mind that the interest rate you’ll be charged will be far higher. This is because lenders are taking on extra risk when they lend to you at this level, and you’ll be expected to pay more accordingly. If you can spend a little longer saving to build up a 10%, 15% or even 20% deposit, it could be a lot more cost-effective in the long run, as you’ll be able to access lower mortgage rates which will equate to lower repayments and less interest being paid over the life of the loan.
You can choose to save for longer and increase your deposit to reduce your loan-to-value.
Once you’ve got your ballpark figure, you can start looking for ways to build your savings pot. Start the process by developing a savings plan to work out how much you need to set aside each month, which may depend on your ideal timeframe to buy.
Let’s say you wanted to buy within the next three years. Using the example above of a £7,500 deposit, this would mean you’d need to save just over £208 per month in order to reach your goal. You could change your expectations accordingly depending on how realistic you think it is, perhaps extending your timeframe if you don’t think you could save that much each month, or even bringing it forward if you’ve got the capacity to save even more.
Then it’s all about implementing techniques to build your pot, and we’ve got a few suggestions.
One of the best things you can do is cut your expenses, and that means taking a cold, hard look at your current financial situation to see where changes can be made. Start by working out where your money goes each month – make a list of all your expenses, including those that are fixed (rent payments, for example) and those that fluctuate (such as eating out) to get a general overview, and from there you can start to look for areas you can cut back on.
Unused subscriptions are often a good place to start, and be ruthless – when was the last time you used your gym membership, and are all those streaming services really worth it? Cutting back on luxuries can help, too, such as the weekly takeaway or daily coffee. It may seem difficult at the outset, but if you commit to putting the money you would have spent on such items into a dedicated account, you could soon notice the difference.
Once you’ve identified some of the lighter expenses you can cut back on, you’ll want to look a little closer at your weightier financial obligations to see if you can make any improvements here as well. This means looking at things like your credit agreements, in particular your credit cards and loans to look for ways to consolidate or otherwise reduce your repayments.
For example, if you’ve maxed out a credit card or two you may want to opt for a 0% balance transfer card to clear the balance without interest making it more difficult, or if your debt burden is already weighing you down you could perhaps opt for a low-rate personal loan to pay off your credit cards in one go and offer a clear route out of debt. Both of these options will ideally result in lower monthly repayments, freeing up some cash to put towards your deposit fund, while focusing on paying down your debt has the additional benefit of improving your credit score and will, in turn, make you a more appealing prospect to lenders.
Don’t forget about your insurance policies, either. If any are coming up for renewal you should make absolutely certain that you spend the time to compare insurance so as to get the best deal possible, ideally reducing your premiums and, again, giving you the chance to put the savings into your dedicated fund.
It isn’t always easy setting aside money each month, but once you get into the habit, it’ll become second nature and you may not even notice the change. This is particularly the case if you put any money you’ve saved through cutting your expenses directly into your savings account, and once you’ve worked out how much you can realistically save, you could go one step further and automate it by setting up a regular transfer as soon as you get paid.
It’s worth seeing if your current account offers additional tools that could help you reach your savings goals as well. Some banks, such as Starling, allow you to automatically round up any transaction to the nearest £ and put the change straight into a savings account, and others come with handy budgeting tools that can let you easily see where your money is going. Budgeting effectively is key when it comes to saving, and remember, even small changes can add up over the long term.
One of the best ways that first-time buyers can boost their pot is to take advantage of Government support, which is where the Lifetime ISA (LISA) comes in. The LISA is specifically designed for those looking to save for their first home or retirement and offers the chance to secure a Government bonus to help them do just that – anyone aged between 18 and 39 can open a LISA and stash away up to £4,000 each year, with the Government adding a bonus of 25% on top. This means that, if you save the full £4,000, you’ll receive an additional £1,000 from the Government each year, which could soon see your total add up – particularly when you consider that you can earn interest on the bonus element, too. Read our guide to find out more about Lifetime ISAs.
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Apart from the LISA, you may want an additional savings pot for some extra flexibility, and finding the right account is key. This is where our savings charts come in. Given that you’ll likely be drip-feeding your savings into the account on a regular or ad-hoc basis, your best bet may be to consider an easy access account, or perhaps a notice savings account for slightly higher rates, provided you’ll be able to give enough notice to withdraw the funds before buying your home. Variable rate accounts such as these will normally allow you to add to your pot whenever you wish, which can be ideal for this scenario where you could be saving for several years.
It’s true that fixed rate bonds offer better returns, but given that you typically can’t make further additions for an extended period of time, it may be best to forgo such accounts for the purpose of saving for a deposit. The exception to this is if you have a significant lump sum that you want to lock away at the outset, in which case finding the best fixed rate bonds could be your first port of call.
It’s worth pointing out that it isn’t just the value of the deposit you’ll need to consider – buying a first home comes with plenty of additional expenses from legal fees to moving costs, so it’s important to factor these extras into your overall savings plan.
You’ll need to consider your credit score, too, as although not strictly relevant to your savings goal, it can make all the difference when it comes to accessing that all-important mortgage. A poor credit score means you’ll be less likely to be eligible for a mortgage and, even if you are, you could face higher interest rates, so now’s the time to check your credit report and see how to improve your score.
Above all, remember that saving for a deposit takes time. It won’t happen overnight and it may seem impossible at first glance, but if you set a plan, find the best savings accounts and keep focused, you could soon save a big enough sum that can help you buy the home of your dreams.
Use our calculator to work out how much you could borrow.
To find the best mortgage deal it may be worthwhile speaking to a mortgage broker who will have access to all market deals and be able to highlight the best deals for your circumstances.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.