First time buyer guide
Saving for a Deposit
What Is a Deposit?
A deposit is a sum of money usually required by the lender before they give you a mortgage. It’s a share of the value of the property, which will be the grounds on which your mortgage stands. The minimum needed is a 5% sum but, unfortunately, such a small amount would restrict your choice of deals. While the best rates are for those able to put down a 25% deposit, a 10% deposit can grant you access to quite a few deals too.
How Can I Save for a Deposit?
Putting money away for a deposit can be hard. So, the sooner you start the better. There are many ways you can make saving up more manageable.
The Government has set up a number of schemes to help first-time buyers onto the property ladder. The following two are designed to boost your deposit by giving you free money, so well worth considering:
- Lifetime ISA: a LISA allows you to save up to £4,000 each tax year until you turn 50, with the government adding a monthly bonus of 25% to the amount saved.
- Help to Buy ISA: this scheme is now closed to new savers. But, if you opened one before 30 November 2019 you can continue to save into your account until November 2029. The government will top any money you save into it by 25%, up to a limit of £12,000.
If buying within a year
When you’re looking to buy in the short term, your choice of savings accounts will be more limited. Depending on whether you’re able to make regular contributions and need access to the money at any point you could consider these options:
- Regular savings accounts usually offer better interest rates but require you to commit to putting in a certain amount each month.
- Easy access accounts, on the other hand, are very flexible. You can withdraw money whenever you like, but, because of this, the interest rates you earn will be much lower.
If buying in the long term
There are many more savings options available to you if you have a little longer to put your deposit together. Some to consider are:
- Cash ISA – the advantage of a cash ISA (Individual Savings Account) is that you don’t have to pay tax on the interest earned. But you can only pay a limited amount into it yearly.
- Stocks & Shares ISA – your money is invested in stocks and shares so the return you get will depend on how well they do.
- Fixed-rate bonds – offer a fixed interest rate on your savings for a set period of time, usually 1 to 5 years.
- Current accounts – the interest rates you can get on these tend to be much better than on easy access accounts. But, you do need to have a little starting cash.
Plus, have a read of our article Savings Accounts Explained for more detail on how each of these works.
If you’re looking for a helping hand
Here are some options to consider that could have an impact on the size of your deposit and allow you to get a better mortgage deal:
- Buy only part of a property: if you have a small deposit, shared ownership properties might be a much more affordable option for you. With the ‘Help to Buy Shared Ownership‘ scheme, you buy part of your property and rent the rest. So you need a much smaller deposit and you pay less for the mortgage.
- The Bank of Mum and Dad (BOMAD): if your parents or grandparents are willing and able, they could make putting a deposit together so much easier for you. Giving you a (tax-free) cash gift, loaning you the money or being your guarantor are some of the ways in which they could help out.
- Shared equity scheme: some property developers, or the government, give you an equity loan to put towards increasing the size of your deposit. Then you take out a shared equity mortgage on the rest of the value of the property. So, by making your deposit bigger, you will be improving your chances of getting a good mortgage deal. To learn more about how the government’s scheme works read our Help to Buy Equity Loan article.
If you’re renting
These seemingly small gestures could free up some cash to put into your savings:
- You might like to consider going back home to live with your family for a short period of time. Renting your own place can make it very hard for you to save any money at all.
- You could also move into a shared house as rooms are much cheaper.
- If you live alone you could get a flatmate, provided your landlord is ok with it.
- You could reduce the price of your rent by being really honest about what you actually need. Are 3 bedrooms really necessary? Does living so far away from work pay off?
Lenders are applying stricter affordability requirements to borrowers since the financial crisis, so the need to save is much higher nowadays, especially for first-time buyers. Remember, the bigger the deposit you can put on the table the better access you’ll have to good deals as you’ll be considered lower risk.
And don’t forget to check out our True Costs of Buying a Home article for a full breakdown of all the other costs you’ll need to save up for.