Saving for a mortgage deposit typically takes around ten years and requires careful planning and discipline with your money
If you are already paying rent where you live, it can be extremely difficult trying to gather any savings together for a mortgage deposit. Saving for a mortgage deposit can make a huge difference to the type of mortgage you can get and the home you can afford.
It will take you plenty of time to have saved up enough money to put down a mortgage deposit and have additional savings to cover all the extra costs such as legal fees, stamp duty, mortgage arrangement fees and moving costs.
On top of this, a mortgage requires monthly repayments for around 20 to 30 years, depending on your mortgage. In some cases for first time buyers and 90% or 95% LTV (Loan to Value) mortgages you can get mortgages that last up to 35 to 40 years.
No shortcuts to getting a deposit
You will probably be tempted to find a quicker way to getting enough deposit to buy a home, but it is best to look for the mortgage option that works best for you, not just now, but for the next 20 to 30 years.
Many people ask if you can get a loan for a mortgage deposit. In theory, you could potentially use a credit card towards paying a mortgage deposit, but the reality is that you will most likely be unable to do that.
With more stringent measures being taken by mortgage lenders during the application process, you will be asked to provide evidence of all the credit you are currently using.
If there is still plenty of debt that needs to be paid they are probably going to take the view that you are not ready to take on potentially 20 to 30 years of debt with a mortgage.
Make sure you can commit
Before you put all your money down for a mortgage deposit, you will need to first take a look at a few things in your financial circumstances. What is your salary? Are you in a permanent position or does your income fluctuate? What is your credit score like? Are mortgage providers likely to reject your application even if you have a large deposit?
If the answer to the last question is leaning towards a ‘yes’, then focus on the factors that could be bringing your credit score down.
Check that you have no missed repayments and that you are on the electoral register at the address where you currently live.
How much do I need to save for a mortgage deposit?
The mortgage deposit amount you need depends on the value of the house you want to buy and the amount you will be allowed to borrow, which is mainly based off of your income and credit score. How to save for a mortgage deposit will also depend on how much you can afford to keep back each month after paying all your bills, rent and living costs.
Generally, 40% of the property value will give you access to the best mortgage deals, but between 10% and 20% can be enough to get a mortgage. There are some mortgage deals and government schemes that will let you put down a deposit of just 5%.
Saving for a mortgage deposit tips
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 just a little easier. The first thing to do is to look at your running costs and see if anything can be reduced or cut out altogether.
And if you can gain any extra money through a savings account’s interest, then that’s a bonus.
Reduce the cost of your rent
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 saved plenty more towards your deposit than if you were paying rent.
If that option doesn’t work for you, then consider moving into a shared house where the rent is likely to be cheaper than if you currently rent a one or two bedroom flat.
Alternatively, you could look at becoming a property guardian. Some companies, like Camelot, look after listed buildings and need people to live in them to ensure they are well looked after. Usually the rent is much cheaper, sometimes free, but often you are unlikely to have a guarantee on how long you can stay.
Use a government Help to Buy or Part Buy scheme
As mentioned previously, you might be able to get away with only saving up a mortgage deposit worth 5% of the property’s values. When you save for a mortgage deposit, you will need more than the 5% deposit for extra costs, and be sure to have a steady and high enough income for the next 30 to 40 years, as 95% mortgages will take a lot longer to pay back.
If you use a government scheme like Shared Ownership, also known as Part Buy, or the Help to Buy scheme, your mortgage application may be considered even if you only have a 5% deposit. However, there are some drawbacks, including the length of the mortgage term, and your rights are slightly more limited with regards to equity if you want to sell the property on later.
Savings accounts for mortgage deposits
Put your cash into a savings account so that your mortgage deposit will appreciate in value until the time 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.
The higher the interest rate, the more you could get on your savings, and vice versa, but this also impacts how expensive your mortgage could be, so it often works both ways.
If you are hoping to buy a house within a year, then an easy access savings account with your current account provider could be sufficient.
Take a look at current accounts and see if there is a bank out there that offers a better interest rate on your savings than your current bank.
If you are looking at buying a house in a year or two, then look into putting your money away into a Cash ISA, which will protect a portion of your savings from tax.
If you go past the ISA limit, then you can also put some of your money into a fixed rate bond or savings account that locks your money away for a year or two, but usually with the hope of offering you a higher return on investment.
If you want to save for a mortgage deposit, utilise all your options and do your research so that in the long term you the mortgage deal you choose is the right one for you.
- What size mortgage can I get? – Finding the right size of mortgage you can get before you start house hunting is a sensible move to help you set your budget.
- First-time buyers – Buying your first home can be both exciting and daunting, but thoroughly planning your finances can keep you on track.