How to save for a deposit
Top tips for first-time buyers
The thought of buying a house may make even the savviest of savers go weak at the knees. While saving for a first home for many can be a long and gruelling process, it’s best to start early and save as much as you can possibly stretch to. It’s no secret that the bigger deposit, the lower lending risk you will be and most importantly, a sure-fire candidate for getting a mortgage.
To help you make that first step on the property ladder, we’ve come up with 6 helpful tips to guide you on saving for a deposit on a home.
1. Research the property market
Before you start saving for buying a house, calculate how much you need to set aside for a deposit. Research house prices for the ideal property and the area you want to buy in. Rightmove and Zoopla are useful places to get an idea into houses for sale and local house prices. The average house price in the UK is £200,280, according to 2015 Halifax figures. That means to buy a property for that price, you will need to save at least £10,000, which would give you a minimum five per cent deposit and even then your choice of lenders and deals will be limited. Putting down a 10 per cent deposit (£20,000) or more would get you better deals and cheaper rates.
2. Be realistic about what you can afford property-wise
Depending on how much you can potentially save, it may mean compromising on the type of property or neighbourhood you want to buy in. It’s worth checking if you can reduce the deposit you need to pay through the Government’s Help to Buy scheme. If you aren’t eligible for Help To Buy, banks and building societies are making 95 per cent mortgages more widely available again. It may be worth checking in with an Independent Financial Advisor, who can give you tailored advice based on your individual circumstances to help work out what type of mortgage is best for you.
3. Learn to cut back
Being frugal when it comes to your lifestyle and related outgoings will help you go further on your deposit saving mission. When you know how much deposit you need, write down a list of essentials and non-essential expense tracker to help you prioritise and achieve your savings goal. This process may take several years and a sizeable chunk of your monthly income. Start by auditing the money you have going out and coming in, and identify possible savings from there. Here’s some quick ideas to get you started:
- Scale back on nights out, shopping trips and pricey holidays
- Take out cash at the beginning of the week and make it last, instead of using debit or credit
- Scrutinise your standing orders and direct debits, there may be an outgoing that you just don’t need anymore
Being more careful with your money will also help when it comes to getting a mortgage. Lenders now scrutinise the bank accounts of potential home buyers to see if they can afford mortgage repayments or routinely splash their cash on non-essentials.
4. Stop renting
If you’re serious about home buying, now is the time to stop renting. Easier said than done right? Many people in the privately rented sector are caught in the so-called “rent trap” where they can’t save to buy their own place because most of the majority of their money goes on rent. It won’t be a viable option for everyone, but if your parents have space and they are willing, consider moving back in and save the money you would have spent on rent each month for a deposit. Alternatively, rent a room from a friend or in a shared house which will be cheaper, than renting your own place and give you a chance to save up.
5. Make regular payments into a savings account
Open a savings account if you don’t have one and set up a regular payment by direct debit or standing order. You will eventually get used to not having the money readily available in your current account and won’t need to remember to pay it in each month. Making regular payments is much better than relying on setting aside infrequent, one-off transfers.
6. Get a Help To Buy cash ISA
Under the current Help to Buy ISA scheme, the government adds £50 for every £200 saved in the account. That’s a 25 per cent return. The maximum the government will contribute is £3,000 which means you will have saved £12,000. But you can put £1,000 in when you open the account – and net another £250 bonus when you come to buy. And couples buying a property together can each take out a Help to Buy Isa and get a total £6,000 bonus. The Help to Buy ISA is available through banks and building societies and offer different rates like normal cash ISAs. So you will earn interest like the regular ISAs as well as get the bonus at the end.
Savers won’t receive the cash bonus until they put down a deposit on their first home. The scheme is available for properties priced £250,000 nationwide and up to £450,000 in London. You don’t have to take out your first mortgage with the same lender that provides your Help to Buy ISA. As ISAs are tax free, there is a limit on the amount you can save. This is up to £15,240 the 2015/16 tax year. If you will want to open a Help to Buy ISA this year be careful not to any money to a cash ISA or you will have to wait until the following year. You can't contribute to a cash ISA in the same tax year as a Help to Buy ISA.