If you are already paying rent where you live, it can be extremely difficult trying to gather any savings together for a mortgage deposit. But saving for a bigger mortgage deposit can make a huge difference to the type of mortgage you can get and the home you can afford.
It will take time to save up enough money to put down a mortgage deposit. To buy your own home, you’ll also need additional savings to cover extra costs such as legal fees, stamp duty, mortgage arrangement fees, and moving costs.
Once you have got a mortgage, you’ll then have to make monthly repayments for around 20 to 30 years, depending on your mortgage. Some mortgages last for less than ten years, other higher LTV mortgages are taken out for 35 years or more.
It’s tempting to speed up the process of saving for a deposit by borrowing the amount you need. That’s why many people wonder whether they can take out a loan for a mortgage deposit.
In theory, you could potentially use a loan or a credit card to cover a portion of your mortgage deposit, but the reality is that you will most likely be unable to do so.
This is because you will be asked to provide details of all the debts you have when applying for a mortgage, and owing a lot on a credit card or having a large personal loan will reduce your chances of being approved by a mortgage lender.
Before you put all your savings towards a mortgage deposit, it’s a good idea to take stock of your financial circumstances. Questions to ask yourself include:
How much do you earn?
Are you employed full time or are you on a short-term contract?
Does your income fluctuate because you are self employed?
Do you have a good credit score?
Are mortgage providers likely to reject your application even if you have a large deposit?
If the answers to these questions suggest you will struggle to get a mortgage, then it might be more sensible to focus on trying to improve your situation, for example by taking steps to increase your credit score.
Ways to do this include checking that you pay all your bills on time, reducing any outstanding debts, and making sure you are on the electoral register at the address where you currently live.
The size of mortgage deposit you need will depend on the value of the house you want to buy. The minimum deposit you will need to take out a mortgage is 5% of the property’s value, with the best deals reserved for those who can raise 40% of the value of the house or flat they want to buy.
However, in the wake of the Covid-19 pandemic, many lenders are asking for a deposit of at least 15%. With the average house price in the UK at just over £250,000, according to the latest official figures at the time of writing, this means a typical buyer needs a deposit of around £37,000. The average price paid by first time buyers is a bit lower at around £230,000, but this still means finding a deposit of close to £35,000 to qualify for a standard mortgage - on top of extra cash to cover related costs such as conveyancing and mortgage fees.
Fortunately, there are ways to get a foot on the housing ladder without spending the rest of your life saving up for a deposit - particularly if you qualify for a government scheme.
The government’s Help to Buy scheme is split into two parts: Help to Buy Equity Loan and Help to Buy Shared Ownership.
Help to Buy: Equity Loan – the government lends you up to 20% (up to 40% in London) of the cost of your new-build home, so you only need to provide a 5% cash deposit to qualify for a 75% LTV mortgage from a participating lender*
Help to Buy: Shared Ownership – Only available on new builds and housing association resales, this scheme involves you buying between 25% to 75% of the property and the property developer/housing association keeping the rest - at least initially. You then pay rent for the percentage of the property you do not own, with the possibility of buying a bigger share when you can afford it
*The current version of this scheme is ending in March 2021, it will be replaced with a new version in April 2021.
These schemes are a good way to get on to the housing ladder with a 5% deposit. However, there are some drawbacks, including the length of the mortgage term. Your rights are also slightly more limited if you want to sell the property later on.
Once you have committed to the prospect of buying your own home, there are a few things you can do to help make saving for a mortgage deposit a little easier. The first thing to do is to look at your running costs and see where you can make savings you can use to boost your mortgage savings account.
Saving for a house is also quicker and easier when you ensure you are earning as much interest on your savings as possible.
Arguably, most people's biggest monthly cost is rent. Unfortunately, it's also a cost that most of us can't do anything about.
If you are fortunate enough to be able to move back in with your parents or relatives, and still be able to commute to work, then it's an option certainly worth considering. Even if you do it for just three months, you will have the opportunity to put three months’ worth of rent into your mortgage savings account.
If that option doesn't work for you, then consider moving into a room in a shared house, where you can pay less rent than you would to have your own house or flat.
Alternatively, you could look at becoming a property guardian. Some companies, such as Camelot, look after listed buildings and need people to live in them to ensure they are well looked after. This is usually a much cheaper option than living in a normal rental property. However, there’s often no guarantee on how long you can stay.
Putting your cash into a savings account should help it to appreciate in value - meaning you will have a larger mortgage deposit to put down when you are ready to put in an offer on a new house.
Depending on how long you want to wait before buying a home, you can find savings accounts that will work for you in the short term, but offer small rewards, or more long term savings accounts for larger rewards.
However, the interest rate for the UK set by the Bank of England is also a factor in determining how much banks and other savings accounts providers will be willing to give you in interest on your cash savings. And at the time of writing, the base rate is just 0.1% - so you are unlikely to find many accounts offering high returns on your savings.
Ways to maximise the interest you receive on your mortgage savings account include:
Using a Lifetime ISA - you can save up to £4,000 a year tax-free in a Lifetime ISA. The government then adds an annual 25% bonus on top, meaning after the first year you could have £5,000. But to get the bonus when you withdraw the money to buy a home, you need to have saved for a minimum of one year
Using a Cash ISA - if you are able to save more than £4,000 a year, a Cash ISA offering tax-free returns could be the best option
Stashing your cash in a fixed rate bond - a fixed rate bond lasting for, say, two or three years may prove the best home for any savings you already have
Taking advantage of special offers - some banks offer savings accounts paying higher rates of interest to their current account customers
Opening a Regular Savings account - these one-year accounts tend to pay higher rates of interest than other types of savings accounts. However, you’ll only be able to pay in up to a certain amount - say £250 - each month. There are also often penalties if you fail to increase your balance every month
Using a high interest current account - some current accounts offer introductory in-credit interest rates that are higher than on most savings accounts