This article is designed to be a brief overview, to prompt you to ask more questions, to help you save towards a mortgage deposit. You might wish to seek professional advice, or speak to a mortgage broker for more information.
Buying a home is a significant milestone, whatever time of life you’re at. But before you can get the keys to your dream property, you’ll need to save for a mortgage deposit. This step is crucial in securing a mortgage – and can impact the terms and rates you’re offered.
Saving for a deposit can be daunting, but with the right strategies and some determination, from tiny seeds grow mighty trees.
Understanding mortgage deposits
Mortgage deposits vary, but typically a mortgage deposit of between 5% to 20% of the property purchase price is required.
So, if you’re buying a £200,000 house, you’ll need a deposit ranging from £10,000 (5%) to £40,000 (20%). A larger deposit often means better mortgage deals and lower interest rates, making it beneficial to aim for as high a deposit as possible.
Setting a savings goal
The first step in saving for a mortgage deposit is to set a clear, realistic goal. Consider the following:
Property price
Research the average prices of properties in the area you wish to buy. You can use websites like Rightmove to search for potential homes via postcode, or sites such as the UK House Price Index which show changes in the value of residential properties in England, Scotland, Wales and Northern Ireland.
Deposit percentage
How much deposit you will need to save will depend on the mortgage you’re able to borrow. Once you know the property price you’re looking to buy at and how much you can borrow from a mortgage lender, you can work out how much deposit you will need. In theory, the larger the deposit you can put down, the lower the risk to the mortgage lender and that often means a lower rate on your mortgage.
The ratio of your mortgage to the value of the property is what mortgage lenders refer to as a loan to value (LTV).
Timeline
Think about how much you can reasonably save towards your deposit each month, considering other things you might need to save for. This will give you a clear timeline for how long it will take to save for your deposit.
Alternatively, you can set a date for when you would ideally like to buy a home and see how much your monthly saving amount will need to be. You might need to sacrifice some other luxuries from your savings budget and other outgoings. That might mean a cheaper car or spending a holiday or two at home.
Whatever you choose to do – stick to it!
Where will you save the money?
Once you’ve done your sums and worked out how much you need to save, you’ll then need to decide where to put the money. You might have already opened an account with your bank or building society for your mortgage deposit, but there are a few pointers to consider.
If you’ll be topping up your deposit fund for a long time, consider how much interest could be earned in this period. Although a savings account is the most common port of call, consider which type of savings account to use. For instance, while an instant access savings account lets you withdraw money immediately, they typically have a lower rate of interest compared to longer-term savings accounts. So, if you’re looking to accumulate savings over a number of years rather than months, it’s well worth checking out the other savings options available. With a regular saver you’d be able to save regularly over time. If you’re happy to have less access to your money, you can invest into a fixed rate bond in return for a higher return of interest.
Budgeting and cutting costs
Once you know how much you need to save (and how long you have to do so), working out a budget is essential in identifying how much you can save each month. Some common tips to help you cut costs and save some money away include:
Track your spending
Consider using budgeting apps or creating spreadsheets to track your expenses and identify areas where you can cut back.
Reduce unnecessary expenses
You can make additional savings by dining out less, cancelling unused subscriptions, and finding cheaper alternatives for your regular expenses. Spending just a little less at the supermarket each week, as well as taking advantage of discounts and promo codes are other ways to bolster your savings pot.
Boosting your savings
In addition to cutting costs, there are other ways to boost your savings:
Open a Lifetime ISA
A Lifetime ISA is designed to help people save towards buying their first home. It allows you to save up to £4,000 each tax year, while the government pays a 25% bonus on the total amount paid into the account.
So, if you deposited the maximum amount of £4,000 in a single tax year, a further £1,000 would be deposited into the account by the government, for free, to boost your deposit savings pot.
Automate your savings
Set up a standing order to transfer a fixed amount of money to your savings account each month. By automatically transferring a specified amount at a particular time, achieving your savings goal is made easier – especially as it reduces the amount of self-discipline required!
Save any windfalls
Top up your mortgage deposit by paying any bonuses, tax refunds, or monetary gifts directly into your savings account. Every little bit helps towards reaching your goal.
Increasing your income
Increasing your income can accelerate your savings. Some potential avenues to explore include:
Side hustles
This is essentially another way of earning money separate from your main job. A side hustle could include undertaking freelance work, a part-time job, or even monetising a hobby. Side hustles allow you to supplement your income, learn new skills, and meet new people, while remaining in charge of how many hours you commit to.
Work overtime
If possible, see if you can take on extra hours at your current job. Perhaps you can work evenings or weekends to boost your earnings? Be careful not to overdo it, though – you don’t want to burn yourself out or leave yourself with no free time.
Sell unwanted items
Another way to make some extra money is to sell items you no longer need or use on online marketplaces (such as eBay or Facebook). You could look to get rid of any CDs, DVDs, books or games that are gathering dust in the corner, as well as freshen up your wardrobe by selling any clothes you haven’t worn in a long time but are still in good condition. Any old children’s toys, along with gadgets like mobile phones, are among other items you could make some money on.
Staying motivated when saving for a mortgage
Saving for a mortgage deposit can be a long-term commitment, so staying motivated is key. To keep a positive mindset, consider the following:
Set and celebrate milestones
Break down your overall goal into smaller, achievable milestones and celebrate when you reach each one. You could even grant yourself a small reward (within your budget, of course) when you are a quarter, halfway or three-quarters towards achieving your savings target.
Visualise your goal
Keep a picture of your dream home or a visual representation of your savings progress to remind yourself of what you’re working towards. After all, this is the reason why you started saving in the first place, so it should give you plenty of motivation to keep going.
Stay informed
Follow the property market and mortgage news to stay motivated and informed about your home-buying journey. You never know what nuggets of information or inspiration you may find.
Seeking professional advice
Consulting with a financial advisor or mortgage broker early in the process can provide valuable insights and personalised advice:
Mortgage brokers & Financial advisers
Mortgage professionals have access to a vast array of mortgage products from lenders across the country. As a result, they can offer guidance on the best mortgage deals and explain the buying process. Utilising their knowledge and experience can help you find the mortgage most suited to your circumstances. They can also help explain any terms and conditions, as well as assess your financial situation and advise on how much you would realistically need to save for a deposit.
Saving for a mortgage deposit in the UK requires discipline, planning, and patience. Remember, every small step you take brings you closer to your goal.
So, whether you’re a first-time buyer or moving up the property ladder, saving towards a deposit is a critical step in your homeownership journey. With the right approach and a bit of perseverance, you could be getting the keys to your dream property sooner than you think.
