Saving for a home - your mortgage deposit
To buy your first home you’ll almost certainly need a mortgage – and to get that mortgage you’ll need a deposit. A deposit is a lump sum of money, typically at least 10 per cent of the purchase price and often more. It’s a lot of money to try and save up, but it can be done.
Here’s what you need to know about deposits and how to save up for yours.
What is a typical deposit?
The amount you need for a deposit will depend on two main factors: the price of your chosen property and the terms of your mortgage deal. Most deposits are between 10 per cent and 40 per cent of the property value, with 20 per cent being the most common.
The money you put down as a deposit becomes your equity – the proportion of the home that you own outside of the mortgage.
Can my deposit be less than 10 per cent?
There are some mortgages available with 5 per cent deposits, but these tend to charge higher interest rates, so you end up paying more in the long term.
If you’re buying a brand-new home, you can apply for the government’s Help to Buy Equity Loan. The government will lend you up to 20 per cent of the price of the property, which you don’t have to pay back for the first five years of owning your home. This means you can put down a 5 per cent deposit, with the government loan making up the rest of the lump sum required by the mortgage lender.
What happens if I put down more money?
Generally speaking, the higher your deposit, the easier it is to get a mortgage – as long as your income is high and stable enough to afford the monthly repayments. What’s more, you may be offered a better mortgage deal (e.g. with a lower interest rate or otherwise better terms) that makes the mortgage more affordable overall.
What’s the best way to save up a deposit?
The two most popular ways to save up a deposit are the Lifetime ISA and the Help to Buy ISA. Both of these offer a government bonus on savings used to buy a first home.
Lifetime ISA – also known as the LISA, this allows you to save a maximum £4,000 every year, with no tax on any interest or growth. The main advantage is that the government will top up your savings by 25 per cent at the end of each year they are invested. This means you’ll have to wait at least a year before using your LISA to buy a home.
Before the age of 60 you can only benefit from the government bonus when you use the money to buy a first home. If you draw money out for any other reason before that age, you will pay a 25 per cent penalty. A LISA can only be opened by people under the age of 40.
Help to Buy ISA – this ISA also gives you a 25 per cent bonus on your savings, though you can only pay in a maximum of £200 a month, so the total bonus won’t be as much as you would receive from a LISA. Also, the bonus is only paid when you complete on a home purchase, so the money is transferred to the mortgage lender via your solicitor during the conveyancing process.
There are a couple of advantages over the LISA, however. One is that you can open a Help-to-Buy ISA at any age over 16, and the other is that you can use the money at any time after three months of opening the ISA.
Talk to a financial adviser or mortgage adviser about which of these ISAs may be best for your needs.
What can I do now to save money?
Having picked your savings product, it’s now up to you to save! Here are some tips to start you off.
A few small lifestyle changes can make a big difference over time. Cut down on regular non-essential spends: coffees, meals out, shop-bought lunches, gym memberships etc.
Pay yourself first – put away a set amount as soon as you are paid, rather than at the end of the month when you may be running low.
Use a savings app to make the job easier. Some help you identify bad spending habits, others drip-feed money into your savings. Browse around to find the one that suits you best.
Remember it’s a marathon, not a sprint. Reward yourself occasionally for meeting savings targets, and you won’t get disheartened.
It can also help to talk about saving strategies with your financial adviser – they are particularly good at identifying everyday cost savings. Also remember that you need to save up a bit more than just your deposit, for the other costs of moving such as your solicitor.
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