Saving for a house

Saving for a deposit and all the extra costs that come with buying a home can feel overwhelming at times. We’re here to help.

1. Consider your options

The first step towards buying a home is to work out roughly how much you’ll need to save for a deposit. The deposit amount will vary depending on the type of mortgage you’re going apply for. Although the average first-time buyer puts down a 20% deposit on their first home, some lenders will accept as low as 5%, and the number of mortgages requiring a 10% deposit are on the rise.

Typically, the minimum deposit for a buy-to-let mortgage is 25% of the property’s value.

Keep in mind that the larger the deposit, the lower the interest rate is likely to be and the better chance you’ll have of being accepted for a mortgage.

Tip: Consider mortgage deals by true cost. This includes capital and interest repayments, fees, and incentives due over the initial period of the deal, and is a more effective way of comparing deals than looking for the lowest interest rate deal.

Remember, you’ll also need to make sure you have enough savings to cover additional costs like stamp duty, solicitor fees, property valuation, and surveys.

To be strategic about the way you save, you could consider the following options:

Ask your family for help

If they’re in the financial position to do so, you could seek assistance from ‘The Bank of Mum and Dad’ and get help with a deposit from parents or other family members in the form of a gifted deposit.

There’s also the option for them to contribute more formally via the mortgage lender or act as a guarantor, which means they’ll be liable for paying the mortgage if you can’t.

Use a government scheme

Shared Ownership is a government scheme that enables you to purchase 25% to 75% of your home, with the option to buy a larger share (or the whole property) later on. Going down the shared ownership route will reduce the size of your mortgage and deposit, but you’ll also have to pay some rent.

Help to Buy is a scheme available to first-time buyers who need a little help with their deposit. The home you want to buy must be newly built with a total value of up to £600,000.

With this scheme, the government lends the buyer money in the form of an equity loan towards a newly built property. To qualify for the Help to Buy government scheme, you need to meet certain criteria.

Buy with someone else

You could consider pooling your resources to buy a home with a friend or family member, but it’s important to establish how this would work if one of you decides to sell their share further down the line.

Use our mortgage calculator to see how much you could borrow alone or with someone else, based on your financial circumstances.

2. Work out how much to save monthly

Once you’ve estimated how much you’ll need, it’s time to start saving for a house deposit! This is easier said than done, so it helps to have a plan in place from the beginning.

Depending on how quickly you hope to buy, calculate how much of your monthly salary you’ll need to set aside each month to achieve your goal. You may find that you need to increase your monthly savings or buy a little later than you were hoping.

When that’s clear, set up a standing order for the amount to be paid into a different account. This could be a savings account or an ISA (Help to Buy ISAs are available to first-time buyers). Shop around to find which options are the most suitable for you.

Look closely at how much money you have coming in each month and create a list of all your monthly expenses to get an accurate picture of where your money is going. This will enable you to budget accordingly and make savings where you can.

3. Get started: where to put savings for a house

If you haven’t already opened a separate account to hold your deposit savings, now’s the time time to do it.

If you’re looking to buy soon, you could stash your cash in an instant access bank account. But if you’re not planning to buy for a few years, it might make more sense to consider placing your funds in a fixed-rate ISA where you’re likely to make a bit more on the interest.

First-time buyers can take advantage of one of the many Help to Buy ISAs available today. With this type of account, the UK government will add 25% (up to the value of £3000) to the final amount when you’re ready to buy your home.* As with any savings account or investment, terms apply, so be sure to do your research first.

Once you’ve decided where to store your savings, set up a regular payment from your current account each month.

* Helptobuy.gov.uk

4. Watch your savings grow

Be a savvy saver and review your savings account at least annually to ensure you’re still getting a good return from interest.

If you’ve set up an ISA, keep an eye on when it’s due to expire as it might revert to a lower interest rate account. Interest rates and initiatives are always changing, so don’t be afraid to move your money elsewhere if it means you’ll accumulate more in the long run.

Don’t forget to review the amount you’re paying into your savings account each month. If your salary has increased or you’ve managed to cut back on your outgoings, consider increasing the amount you put aside. After all, any surplus money can be put towards moving costs and furnishing your new home.

5. Cut your costs

For many people, cutting unnecessary costs is a viable way of making respectable savings. The less you spend on superfluous things, the more you can set aside for a deposit.

Firstly, consider your regular payments; could you cancel the gym membership that you forgot about? How about the subscription to that music service you don’t use anymore?

If it’s a viable option, think about moving back home if it’ll enable you to save on rent and bills. If you live on your own in an expensive city like London, consider moving into a shared house or flat to cut costs and save more.

Little things can make a big difference: instead of buying lunch out everyday, opt for a packed one instead.

6. Make the most of government house buying schemes

If this is your first foray into the world of property purchasing, consider using an ISA designed specifically for the first-time buyer.

Help to Buy ISA

A number of banks and building societies offer these accounts and the government will supplement your savings by 25%. The minimum government bonus is £400 so you need to have saved at least £1,600 to be eligible for it.

When you first open an account, you can deposit up to £1,200 and put in up to £200 a month thereafter. The government will pay a maximum bonus of £3,000 once you’ve saved £12,000 into the account.

This type of account is available to individual first-time buyers, so if you’re purchasing a home with a partner, for instance, you could receive up to £6,000.

It’s important to bear in mind that you can’t put the money you save in the Help to Buy ISA towards a deposit, and with a maximum threshold of £200 a month, saving can be slow.

Lifetime ISA

Depending on your circumstances and the value of the home you want to buy, it could make more sense to opt for a Lifetime ISA.

To open a Lifetime ISA you must between 18 and 40 years old, and either a resident of the UK, a Crown Servant or the spouse or civil partner of a Crown Servant.

This ISA is a tax-free account and the government will contribute a bonus of 25% of the money you save, up to a maximum of £1000 a year. You can deposit up to £4000 a year into the ISA until you reach 50.*

Lifetime ISA providers could have their own set of conditions when you sign up for an account, so be sure to do your research first.

* Gov.uk

Help to Buy: Equity Loan

Equity loans are available to first-time buyers and existing home owners looking to move. To be eligible for the loan, the home you’re looking to buy must be a new build and can’t be more than £600,000.

With this type of loan, the government lends you up to 20% of the cost of the property, meaning you’ll only need a 5% deposit and 75% mortgage for the rest.

There’ll be no loan fees on the 20% for the first five years, but you’ll have to pay fees thereafter.

When it comes to mortgage payments, there’s lots of help out there for first-time buyers.

7. Consider low-risk investments

If you’re comfortable with tying your money up for a period of time (ranging from a few months to a few years), you might want to consider putting all or part of your savings into a low-risk investment scheme.

You could consider:

Dividends on shares

The returns on shares can sometimes be more attractive than those on savings accounts, and many companies pay dividends of around 5%. However, keep in mind that companies can reduce their dividends at any time to cut costs.

Equity Income Funds

Equity Income Funds are portfolios comprised of 30 or 40 dividend-paying stocks. The ‘diversified’ nature of this option means that if one company performs badly, it won’t affect your overall returns too much.

Fixed-interest bonds

Bonds - otherwise known as ‘fixed-interest investments’ - are essentially I-Owe-You’s issued by companies or governments looking to raise funds. During the loan period, the issuer pays interest and returns the loan amount in full at the end of the term.

Remember, while there’s a chance your cash will grow quickly, investing your money always involves a certain amount of risk.

8. Rent a smaller property

With rental costs on the rise, it may make sense to downsize whilst you save for your deposit. This could end up saving you thousands over several years. Alternatively, you could move into a shared property where all bills are split between multiple occupiers.

If you live in one of the UK’s major cities, you might want to consider buying a home in a more competitively priced location. Even if you decide not to live there, you could opt for a buy-to-let mortgage and rent out the property until you can afford a more expensive one.

However, keep in mind that this strategy might not work if you struggle to sell your buy-to-let property for any reason, for example if house prices in the area fall.