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?
Unless you’re making a monthly fortune at work, 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.
If you’re looking for a helping hand:
1. The Bank of Mum and Dad (BOMAD): if your parents are willing and able, they could make this so much easier by:
- Giving you a cash gift. This would be tax-free for you.
- Loaning you the money. If done informally you could work out how and when to give them back the money and the interest you would pay them (or not).
- Or you could do things more formally and get them to be your guarantor. This would make them liable for paying your mortgage if you can’t manage.
2. 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.
3. 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 basically, by making your deposit bigger you will be improving your chances of getting a good mortgage deal.
If buying short-term (within a year):
- A regular savings account could be interesting for you. They usually offer better interest rates in exchange for you locking up your money for a year or so.
- 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. It’s still an option worth bearing in mind if you have less than a year to save for a deposit.
If buying long-term:
- 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.
- Fixed rate bonds and even current accounts may also be a good option. 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.
- 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 you’re renting:
- 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?
These seemingly small gestures could free up some cash to put into your savings.
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 the lower the risk you’ll be considered. So, come on, get the saving started!
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.