One of the biggest hurdles when buying your first property is saving for the deposit, which is often a considerable amount of money - usually 10% of the property price.
Creating a budget can be an effective method for saving a deposit. Additionally, there are various steps that may help individuals reach their savings goals. Consulting a mortgage broker can provide access to expert guidance during the process.
This guide will cover why you need a deposit and how much you need to save, so you know what to expect throughout the process.
What is a Mortgage Deposit?
Your deposit is the percentage of the property price, which is paid upfront, with the remaining amount borrowed as a mortgage. A larger deposit typically reduces the amount required to borrow through a mortgage.
How much of the property’s value you borrow is known as the loan-to-value (LTV). When mortgage lenders advertise mortgage products, it will state the maximum LTV allowed. For example, if you have a 20% deposit and so need to borrow 80% of the property’s value as a mortgage, your LTV will be 80%.
Lower LTVs are often associated with more favorable mortgage terms, reflecting a reduced risk to lenders.
Read more: Understanding the Different Types of Mortgages
How Much Will You Need to Save?
A minimum deposit of 5% is often required; however, saving 10% or more may provide access to a broader range of mortgage options. Some lenders offer 100% mortgages which typically come with conditions including having a guarantor.
The amount needed for a deposit depends on the asking price and the amount of mortgage your chosen lender approves. How long it takes for you to save for a deposit will depend on how much you can afford to set aside each month.
In addition to the deposit, it's important to consider other costs associated with purchasing a house.
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How Do I Create a Budget?
Creating a budget is one of the best ways to grow your savings. Look at your outgoings to see how much you’re left with each month after bills, such as rent, council tax and utility bills, are taken care of.
he time required to save for a deposit depends on the amount set aside each month; assessing one's financial capacity can aid in setting realistic savings goals.
A more expensive house will, of course, take longer to save for. Opting for a lower-priced property may enable individuals to enter the property market sooner.
How Can I Boost My Savings?
Spending less than one's income can increase the amount available for savings. Reviewing expenses may help identify opportunities to reduce outgoings.
Set up a standing order to yourself
Set automatic savings
Cancel unused subscriptions and memberships
Cut down on luxuries
Eat out less
Buy generic
Sell your stuff
Consider a second income
Spend within your means
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How Can I Save for a Property While Paying Rent?
One of the biggest issues with saving for a deposit is saving whilst renting. With rent costs at an all-time high, it can seem impossible to put away any amount of savings, especially in large cities like London.
Here are some options to consider when renting:
Flat Share
Renting alone can be very expensive, you’ll be paying the whole cost of the rent and bills on your own. Why not share the cost of rent plus the bills by living with other people, either with friends or via sites such as SpareRoom.
Relocate
If it works for your lifestyle and work commute, try renting in a cheaper area in your city. It’s not forever and could save you hundreds a month in rent and council tax.
Move Home
Although not an option for everyone, some first-time buyers move back in with their parents while saving for a deposit. This works best if your parents won’t expect you to pay rent - and they live within commutable distance of your job.
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What Sort of Savings Account Should I Use?
While keeping savings in a bank is common, understanding the different types of available accounts can be complex. Here are some options to consider:
Lifetime ISA
The Lifetime ISA (LISA) is an Individual Savings Account which benefits from extra money from the government and can be used to buy your first home or to fund your retirement after the age of 60.
The Lifetime ISA is open to UK residents over 18 and under 40.
The government will add a 25% bonus to your savings, up to a maximum of £1,000 a year.
When you turn 50, you will no longer be able to pay into your Lifetime ISA nor earn the 25% bonus, however, your account will still stay open and your savings with still earn interest or investment returns.
You can contribute up to £4,000 every year until you turn 50.
You can hold cash or stocks and shares, or a combination of both, in a Lifetime ISA.
Using the Lifetime ISA to Buy Your First Home
You can use funds in your Lifetime ISA to buy your first home if:
The property costs £450,000 or less.
You buy the property at least 12 months after you open the Lifetime ISA.
You use a conveyancer when purchasing.
You’re buying a property with a mortgage.
Other savings accounts
A Lifetime ISA is one option for holding deposit savings. However, you can also use:
A regular savings account
An instant access savings account
Whatever kind of savings account you choose, it’s a good idea to set up a standing order or direct debit.
You will be able to have a regular savings account in addition to a Lifetime ISA, which gives you more than one option when it comes to storing and growing your savings.
Comparing savings accounts with favourable interest rates, including those offered by different banks, can be beneficial. A high-interest rate on a savings account means your savings can grow faster, getting you closer to your goal of home ownership.
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Can I Use a Loan as a Deposit?
Using a loan for a mortgage deposit may affect mortgage eligibility.
A deposit can indicate financial management and savings discipline to lenders; therefore, funding it through a loan might impact the attractiveness of a mortgage application.
Various government schemes are available to assist first-time buyers in purchasing property.
Help to Buy: Shared Ownership
The Help to Buy: Shared Ownership offers potential homeowners the chance to buy a share of a home (between 25% and 75% of the home’s value) and pay rent on the remaining share.
This is open to those whose household earns £80,000 a year or less outside London, or £90,000 a year or less in London. You’ll need enough savings to cover 5% of the share you’re buying, and where you are located in the UK will determine how you apply.
Financial Help From Family Members
Some first-time buyers obtain financial assistance from family members when purchasing their first home. These include:
Providing a gift of cash for the deposit
Offering a loan for the deposit
Serving as a guarantor on the mortgage
Entering into a joint mortgage agreement
