Saving for a mortgage to buy your first home has never been easy, but it's certainly more difficult today than it was five years ago. Higher property values and interest rates can make saving a deposit for a house difficult to achieve. As the deposit is the largest financial outlay of the home buying journey, having a clear plan of how much you need and how to achieve it is a sensible move. We’ll look at typical deposit costs and how best to meet your savings goals.
When you buy a home you’ll need to put down a cash deposit to borrow the remaining cost of the property from a mortgage lender. The average first-time buyer in the UK uses a 20% deposit and borrows 80% of the cost of the property, but it’s possible to buy a home with a deposit as low as 5%.
You will also need the following to get a mortgage:
ID - Proof of your own identity as well as your current address will be needed
Regular income - this could be from employment, self-employment, a pension or investment and savings income. You will need to provide proof of whatever type(s) of income you have
Fee payments - As well as saving for a house deposit, make sure that you have additional funds available to cover the other fees and expenses involved with getting a mortgage (explained in detail on the table below)
Good credit score - Your credit score can impact how much you’re lent and the interest rates offered. Those with a poor credit history may need to consider a bad credit mortgage
The amount you need to save will vary depending on the type and value of the property you want to buy. If you’re saving a deposit for a house, you are likely to need quite a lot more than buying an apartment in the same area. However, it’s also possible that a flat in London could cost more than a house in the north of England, so it’s important to do your research.
Look at property websites, such as Zoopla, to get a good idea of how much the type of property you’re looking for will cost. You can then use an affordability calculator to see how much you may be able to borrow based on your current income.
The minimum deposit you’ll need to get a mortgage is 5% of the property value. There are a number of 95% mortgages available on the market, but only having a 5% deposit will narrow your options.
If you’re looking at a 5% deposit, based on the average cost of a UK house, this would be in the region of £12,915 - due to an average house costing £258,297*.
Of course there are huge regional variations in property value, so the deposit size needed will largely depend on where you buy.
*In March 2023. Please note average house prices are subject to frequent change.
You will have far more options available to you if you can increase that to 10 or 15%, as this will lower the loan to value (LTV) of your borrowing. A lower LTV also gives you access to more competitive interest rates.
Many mortgages don’t have a minimum income requirement, but where this is the case it tends to be in the region of £20-25k. If you’re looking for an interest-only mortgage, however, the minimum income requirements to purchase your own residential home can be much higher (typically £50-75k).
It’s also important to understand that whilst income is a big part of getting a mortgage, lenders are actually looking at your overall mortgage affordability, which is slightly different.
You could have a relatively high income, but if most of that is utilised, your affordability may still be lower than someone on half your income. As lenders take a close look at your outgoings, cutting back where possible is a great plan, pre-mortgage application.
The best way to save for a house is with full knowledge of the costs involved in the home buying process - which goes beyond the deposit. The below table provides an overview of the other costs to be aware of and their average cost.
|Fee type||Typical average cost|
|Valuation fee||£0-£1500 - Depending on the complexity and the property value|
|Arrangement fee (sometimes known as product fee or mortgage setup fee)||£0 - £2000+ - Depending on the individual lender, mortgage product, and the value of the mortgage|
|Legal fees - including conveyancing, search fees, land registry costs and funds transfer fees (all are usually payable to your solicitors)||£1500 - £3000 - Depending on the firm used, complexity of the mortgage application and value of the property|
|Stamp Duty||This is not payable on the first £425,000 of your property value if you're a first-time buyer. Click to use our stamp duty calculator.|
|Buildings insurance||Most mortgage lenders will require this to be in place to approve the application. Typical costs are around £150 per year|
|Other costs - It's a good idea to have discretionary fund to pay for moving costs and any last minute extras that you weren't anticipating - perhaps a more thorough survey, for example||£1000 but the size of this fund is likely to be a more personal decision|
Please note: not all of the costs will apply to every mortgage and costs vary based on a range of factors, including property value. It’s, therefore, a good idea to research the costs involved with buying your first home before you begin looking for a mortgage.
Saving for a mortgage can take a considerable amount of time, but there are a few things to consider that could speed up the process:
Make the most of your savings - make sure you look at high interest savings accounts or ISAs, which allow you to save a certain amount interest-free every year. If you’re under 40, you could also use a government LISA (Lifetime ISA) which tops up your savings by 25% to help you save a mortgage deposit more quickly
Utilise autosave - There are a number of ways you can automate savings now, either direct debit payments into a savings account, or most banks now offer a roundup facility, where they automatically round up purchases to the nearest pound and save your change for you
Lifestyle changes - Most people can probably find ways to cutback on their spending, whether that’s simply cancelling unused gym memberships, by comparing utility costs to see where they could save, or even something more drastic, such as moving in with family or friends to cut down on rental costs
Help from friends and family - There are a number of ways you can get help from your friends and family when it comes to saving for a mortgage. You could use a gifted or partially gifted deposit from close family, or ask someone to help you get a guarantor mortgage, if your deposit or income is too low to meet the mortgage criteria
Get a joint mortgage - If you’re struggling to save for a mortgage by yourself, a joint mortgage with a partner, relative or friend could increase your affordability and deposit saving ability, meaning you can buy a home earlier
Shared ownership mortgage - A shared ownership mortgage reduces the affordability and deposit requirements of buying a home, as you only buy a percentage of it. This can be a good way to get on the property ladder sooner and you can usually increase ownership over time
No matter what your circumstances or the type of mortgage you need, a larger deposit will give you more mortgage options and access to more competitive rates of interest. This is because the greater your investment into the purchase, the lower the level of risk the lender takes on in lending to you.
It also puts you in a better position with equity, as you essentially already own the amount you’ve paid for.
Equity = the percentage of the property value that you currently own
Equity increases as you repay the mortgage, and as property prices rise. Unfortunately it can also reduce if the value of your home goes down, however, a larger deposit offers more protection from negative equity (where you owe more than your home is currently worth).
Lastly, as interest is charged on the mortgage balance, so the more you borrow, the more interest you’ll pay. A larger deposit therefore equals less interest is incurred over the life of the mortgage