Mortgage deposits explained
It’s getting harder and harder to get on the property ladder. Houses that once were affordable are now completely inaccessible, and it’s getting more challenging. Couples who are each earning a good wage struggle to save due to high rents - monthly payments that actually surpass average mortgage repayments.
So, how do you actually save for a deposit? And if you can stash some cash away, how much do you need to put down as a deposit? Fortunately, we’re here to answer your burning questions about saving for a deposit.
In This Guide:
- How to save for a deposit
- Limit your outgoings
- Switching providers
- Help to buy scheme
- How much will the bank lend?
- How much deposit do I need?
How to save for a deposit
Before you start saving, make sure that your finances are in order and check you have a good credit rating. Applying for a savings account and being rejected can affect your credit score. So it’s wise to check what your credit score actually is - you can use our online credit score checker with Experian.
There are then some simple steps you can take to save for a deposit which don’t require a big promotion.
Start by opening a high-interest savings account. Currently, interest rates are low, which is great news for those with mortgages, but not so great for us trying to save. So, first, spend some time researching accounts to compare those that offer the highest interest rates.
You can receive other types of rewards or benefits for changing banks, too. Head to our savings account comparison tool to search what’s on offer. Don’t be loyal to your current savings account just because you’ve had it since you were 16, some deals are just way better than others so make sure you get the most out of your bank. Everyone else is making money off savings, and so should you.
Unfortunately you can no longer open a Help-to-Buy ISA. But you can open a Lifetime ISA (LISA) to save towards a first home (or your retirement). With a LISA, you can save up to £4,000 every tax year with the state adding a 25% bonus on top of what you save, meaning you could get a £1,000 added annually. And you’ll earn interest on whatever you save which is also tax-free. Shop around because with the right account, you can maximise the financial support that’s out there.
Limit your outgoings
Have a think about any lifestyle changes you can make. We know it’s nice to have extra space, but if you’re renting a flat with a spare room then consider switching to a one-bed, or even a studio. Or, if it’s viable, look into moving back in with mum and dad for a while for reduced rent (and delicious food).
But take time to consider more minor life adjustments you can make, too: could you cut down on your transport bill by walking to work? Or reduce your food expenditure by making lunch at home? If buying lunch and a coffee each day costs you a fiver, that’s £25 a week saved. That’s nearly £1,500 a year saved, and when you add this to other changes such as reducing transport bills, you’re well on the way to saving.
We’ll never stop advocating about how switching providers can save you money. Take a look at your current phone bill, car insurance plan or energy bill and, if it’s up for a renewal, head to our price comparison tools to see how much you could save. Remember, all these seemingly minor changes add up when banded together, especially if you’re looking to buy with someone else.
Help to buy scheme
Look at the Help to Buy Scheme: Equity Loan. This government scheme was set up to help first-time buyers get on the property ladder; the government will lend you 20% of the value of your house so long as you’re buying a new build. And, you only need a 5% deposit. You could also look into the government’s Shared Ownership scheme in which you can by 25% to 75% of the property and pay rent on the remainder.
How much will the bank lend?
Generally, the bank will loan you 3 to 4 times your annual salary. However, you need to keep in mind how many years you have left until you reach retirement age; the later you get on the property ladder the less time you have to pay the bank back. So, a bank may simply not loan you as much as you want.
As a first point, use an online mortgage calculator see how much you could borrow. If you’ve got your sights set on a £250,000 house, then you’ll need to work backwards from this figure to see how much of a deposit you’ll need to save, coupled with our tips below.
How much deposit do I need?
As gospel, the greater deposit you can put down the better deal you’ll get as you’ll be borrowing less from the bank. With variable interest rates, it’s uncertain how much extra you’ll end up repaying. If you can put down 40% or more then you’ll have access to the best mortgage rates, but saving this much is impossible to most of us (and laughable if you live in the capital).
As a rule of thumb, you’ll need a minimum of 10% of the value of the house as a deposit. If it’s a Help-to-Buy scheme, it’s 5%. Be aware that this is a minimum requirement; if your credit history isn’t glowing you may need to put down more. Plus, as we said, the less you put down the worse mortgage rates you’ll get.