10 min read

How to save for a deposit for your first home

Andre Spiteri
20 July 2017

If you need to get together a deposit for your first home, where do you start? And how much do you need?

Saving for a deposit is probably the most crucial part of buying a property. A lot depends on it: the kind of property you’ll be able to afford, how much you’ll be able to borrow and even the interest rate and terms your mortgage lender will offer you. It may also be the largest amount you’ve ever tried to save up, which can make it seem quite daunting.

In this article, we’ll show you how you can start saving up for a deposit. We’ll also lay out your options if you run into difficulties while trying to reach your goal.

Why save for a property deposit?

Put simply, because you can’t get a mortgage without one. The vast majority of UK banks require a deposit of 5% of the purchase price, at the very least.

5% is a lot more than it looks. In April 2017, the average price of a UK home was £220,094 (£482,779 in London). So, at a minimum, you’ll need to pay £11,005 out of your own pocket (£24,139 in London).

With this in mind, it’s never too early to start putting money away. The sooner you start, the quicker you’ll reach your savings goal and the sooner you’ll have the keys to your new home.

How much should you save for a deposit?

On average, UK home buyers contribute 10% to 15% of the purchase price as a deposit. Based on average UK house prices, that’s about £22,010 to £33,015 (between £48,278 and £72,417 in London).

You can put down a minimum deposit of 5% of the purchase price. However, the more you can afford to save, the better. The larger your deposit is, the less you’ll need to borrow. This has several advantages:

  • It’ll be easier to pass an affordability check and get your mortgage approved.

  • Your lender will likely see you as less risky, which increases your chances of getting a lower interest rate.

  • You’ll have smaller monthly mortgage repayments.

Saving for a deposit: setting your savings goal

Deposits are calculated as a percentage of the full purchase price. So, while you are saving up for a deposit, you need to find out what your overall budget is.

There are two ways to go about this:

  • Use a mortgage affordability calculator, such as the one on the Money Advice Service website.

  • Ask your bank informally how much they’d be prepared to lend you. You can normally do this online or over the phone.

This will show you how much you a bank may lend to you, giving you an idea of what kind of house you’ll be able to afford. If you have an idea of where you’d like to live, it’s worth also checking average house prices in that area.

At this point, one of two things will happen:

  • Prices are within or under your budget. If this is the case, great. You can move on to the next step.

  • Prices are over your budget. If this is the case, you could consider buying a smaller property or try looking at houses in another area.

If both these options are out of the question, you could consider saving for a larger deposit. If this isn’t possible either, there are other financing options you can look into (more on this later).

Don't forget:
While the deposit will be your largest expense, don’t forget to budget for other out-of-pocket costs. These include:

Saving for a deposit: how to get started

The best way to do this is to put away a set sum of money in a separate account each month. You may want to set up a standing order so your money will be moved into your savings account automatically and you’ll have no excuses.

Where to save

This is mostly a matter of personal preference. However, a deposit is typically a short-term savings goal. So, it’s usually best to keep your money somewhere relatively safe and easy to access.

What about investing?
While investing could boost your savings considerably, it isn’t usually recommended for short-term goals like a mortgage deposit. If your investment goes down in value, there may not be enough time for it to recover.

Easy access savings accounts, regular savings accounts and cash ISAs are all good options. Regular savings accounts tend to give the highest interest rates, but you’ll probably have to commit to paying in a set amount each month for 12 months or more. You’ll also have to pay tax on any interest earned.

By contrast, the interest on an ISA is tax-free. You may also be eligible for specific government schemes designed to help you save for a deposit.

Help-to-buy ISAs:

To be eligible for a help-to-buy ISA you must be over 16 and have never owned property.

You can save up to £200 a month. You can also pay in a £1,200 lump sum in the first month. Once you’ve saved up at least £1,600, the government will give you a 25% bonus, up to a maximum of £3,000.

Lifetime ISAs:

To be eligible for a lifetime ISA you must be under 40 and have never owned a home before.

You can save up to £4,000 a year, either as a lump sum or in regular instalments. The government will put in up to £1,000 a year - a savings boost of 25%. In total, you can earn a up to £32,000 in bonuses, depending on how long you keep it open.

Helpful hint:
A lifetime ISA must have been open for at least a year before you can start earning the bonus and take the money out. If you want your deposit sooner, a help-to-buy ISA is the better option. In the longer term, however, lifetime ISAs usually offer better returns.

You can transfer a help-to-buy ISA into a lifetime ISA, but only during the lifetime ISA’s first year.

What if you can’t afford to save for a deposit?

If you’re having trouble saving up enough money for a deposit (and reducing your overall budget is not an option), you still have alternatives.

Help-to-buy equity loan:

With this scheme, you’ll only need to save up 5% for a deposit. The government will lend you a further 20% (or 40% if you’re in London), interest-free for five years.

The equity loan will attract interest at 1.75% in the sixth year and rises at a rate of 1% over the retail price index thereafter.

To qualify for a help-to-buy equity loan, you’ll need to meet the following criteria:

  • you’re not currently a homeowner

  • you want to buy a newly built property

  • the property costs up to £600,000

Shared ownership:

This scheme allows you to buy a portion of your rented home and pay rent on the rest. You can buy between 25% to 75% of a property at any one time, which means you can spread the cost over a number of years until you own the full 100%.

To qualify for this scheme, you’ll need to meet the following criteria:

  • you don’t currently own a home

  • you earn less than £80,000 a year (£90,000 if you live in London)

  • you rent from the Council or from a household association

Family deposit mortgage:

Family deposit mortgages allow a member of your family to borrow against the equity in their home and give this to you to use as a deposit.

To qualify, your helper must usually have a mortgage with that same lender. Your helpers don’t have to be your parents. Grandparents, siblings or even your children can help you out with a family deposit or family springboard mortgage.

Guarantor mortgage:

In a guarantor mortgage, a close family member agrees to cover the debt if you miss your repayments.

Typically, the guarantor is responsible for the whole mortgage. However, some mortgage lenders are now offering mortgages where you can borrow 100% of the purchase price and use a guarantor only for a portion of it. Your guarantor gets their money back - sometimes plus interest - if you don’t miss any repayments for a set number of years.

In a nutshell:
  • Most banks won’t give you a mortgage unless you pay a deposit. You can put down as little as 5%. However, the bigger your deposit, the better you can expect your mortgage deal to be.

  • It’s a good idea to find out your budget while you are still saving up for your deposit. This will help you work out how much you need to save before you begin house-hunting.

  • Property deposits are typically a short-term savings goal. Easy access savings accounts, regular savers and cash ISAs are usually the better choice.

  • Help-to-buy ISAs and Lifetime ISAs are government schemes designed to help you save more for your property deposit.

  • If you can’t afford to save up for a deposit, you may be eligible for a help-to-buy equity loan or shared ownership scheme. Alternatively, a family member may be willing to help you out with a family deposit mortgage or by acting as a guarantor.

by Andre Spiteri

Andre is a former lawyer turned financial writer. Andre has written this article especially for ClearScore.

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