If you are already paying rent, it can be extremely difficult 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 takes time to save up enough money to put down a mortgage deposit. To buy your own home, you also need additional savings to cover extra costs such as legal fees, stamp duty, mortgage arrangement fees and moving costs.
Once you have a mortgage, you have to make monthly repayments for around 20 to 30 years. Some mortgages last for less than 10 years, others are taken out for 35 years or more.
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, it might be 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 roll at the address where you currently live.
The size of the mortgage deposit you need depends on the value of the house you want to buy. The minimum deposit you need in order to take out a mortgage is generally 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.
With the average house price in the UK at just over £270,000, according to official figures at the time of writing, this means a typical buyer needs a deposit of around £13,500 to find any deal or £40,500 to find a cheaper one. The average price paid by first-time buyers is a little lower, 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 for a deposit – particularly if you qualify for a government scheme.
The government’s Help to Buy scheme is split into two parts: the 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 (loan-to-value) mortgage from a participating lender.
Help to Buy Shared Ownership – only available on new builds and housing association resales, this scheme involves you purchasing between 25% and 75% of the property and paying rent on the rest. You can then increase the amount you own when you have saved enough to do so.
These schemes are a good way to get on 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 look at your everyday costs and see where you can cut back to boost your mortgage savings.
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 the majority 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, it’s an option 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, consider moving into a cheaper property.
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 standard rental property. However, it’s not for everyone, because there’s often no guarantee of 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 home.
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 account providers are willing to give you in interest. At the time of writing, the base rate is just 0.25% – 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 can only 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 most savings accounts.
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 are 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 reduces your chances of being approved by a mortgage lender.