The latest Nationwide House Price Index found that during August, the average house price had risen to £224,123, up by 2.0% from the previous month. This, combined with lenders withdrawing high loan-to-value (LTV) mortgage deals from the market as well as historic low saving rates, has made it even more challenging for first-time buyers to save the deposit needed for their first home.
Although the property market could start to slow towards the end of this year and into 2021, when the economic impact of the pandemic becomes clearer, first-time buyers are still having to save hefty deposits in order to buy their first home. In fact, the current average deposit needed to buy a first home is £47,059, which is a 25% increase from 10 years ago when the average was £37,761.
Many first-time buyers have resorted to getting help from parents to boost the deposit they need to buy their first home. But, as lenders have become increasingly reluctant to lend to first-time buyers, relying on parents for deposits is not always an option. For example, last month Nationwide stated that to get a 90% LTV deal, first-time buyers had to prove they had saved 75% of the deposit themselves.
First-time buyers who have been saving for years and finally have a 10% deposit to purchase a home will likely be frustrated that lenders have been pulling first-time buyer deals from the market. Saying this, as the housing market is currently uncertain, there is the risk of those with a low deposit finding themselves in negative equity if house prices fall significantly over the next 12 months. As such, those who have the ability, could consider waiting until the economy stabilises and use the extra time to save for a larger deposit to improve their chances of getting a deal that has a lower interest rate.
The best options available to first-time buyers saving for a house deposit will depend on how much time they have. First-time buyers looking to buy their home within the next year have a lot less options available than those planning to get onto the housing ladder in five or even 10 years time.
Ideally, those who want to get onto the housing ladder should start saving as early as possible and consider opening a Lifetime ISA (LISA), which offers a 25% bonus for those saving for a deposit for their first home. Savers should be aware that there are terms and conditions with LISAs, which are outlined on our LISA page.
Young savers who are looking to save for over five years towards a deposit could also consider investing in stocks and shares ISAs. It must be stressed that stocks and shares ISAs come with the risk of losing all the money invested and should, therefore, be considered carefully before investing. In return for the risk, stocks and shares ISAs often offer higher rates or returns than savings accounts, but they are only suitable for long-term savers, so are not a good option for those looking to buy a home within the next five years. To find out more about this type of investment, visit our stocks and shares ISA page.
Those who have already saved a substantial amount for a house deposit but who are planning to hold off from buying for a few years to wait for the economy to stabilise can consider a fixed rate bond. These types of savings accounts lock money into the account for a fixed period of time. Fixed rate bonds often offer higher rates compared to other types of savings accounts such as easy access accounts, with rates usually increasing the longer the fixed term period. Currently, the best rate on a fixed rate bond comes from Bank of London and The Middle East, which pays an expected profit rate of 1.50% AER on anniversary on the seven-year version of its Premier Deposit Account. UBL UK also offers a rate of 1.50% AER on maturity on its 5 Year Fixed Term Deposit. For savers looking to put their money into a fixed rate bond for just one year, Paragon Bank, United Trust Bank and Allica Bank all offer the top rate of 1.20% AER. Paragon Bank pays this on its 1 Year Fixed Rate Savings Account, United Trust Bank pays this rate on its UTB 1 Year Bond and Allica Bank pays it on its Fixed-Term Personal Savings Account (Issue 8).
There are a number of schemes available to first-time buyers looking to get onto the property ladder, including Help to Buy mortgages, shared ownership, guarantor mortgages and additional help for key workers – we have looked at these more in-depth in our previous story, Help available for first-time buyers looking to get onto the housing ladder.
In addition to this, yesterday the Government announced plans to make changes to its shared ownership model that would make it easier for people to get a mortgage as well as increase their share of ownership by allowing owners to buy in 1% increments.
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