How to save for a mortgage deposit
Knowing how much you'll need to save for a mortgage deposit and the best ways to find the funds will help you get together the cash for your dream home. Read on for guidance on how to save for a mortgage deposit.
For many prospective homeowners, buying a property can seem like an uphill struggle from day one. Rising house prices, reams of paperwork, and that’s before you’ve even begun to consider how to save a mortgage deposit.
A healthy deposit could help you to secure a good mortgage deal with low interest rates. the smaller your income, the lower the amount you can borrow on a mortgage is likely to be. This can seem like a catch-22, but there are lots of ways you can save for a larger deposit — regardless of the size of your income.
By putting in place a solid savings strategy, you can tackle that uphill struggle one step at a time.
How much do I need to save for my mortgage deposit?
For the average first-time buyer in the UK, mortgage lenders will usually need you to commit to an absolute minimum deposit of 5% of the property’s value. It can feel a little chicken-and-egg: you need to know which property you’re looking at in order to save for the deposit, but you also need to know how much you can borrow before you can decide on which properties to consider.
The solution is known as an agreement in principle. The mortgage provider will consider your financial circumstances and income and lay out a guideline of how much they would be willing to lend you and what size deposit you would need in order to access those funds.
Once you have a tangible figure to aim for, you can lay out clear, precise plans on how to reach your goal. Gradual saving is more effective than setting aside irregular lump sums, as you will be able to shape your lifestyle and finances around your outgoing payments into your savings account. It’s important to be realistic about what you can afford whilst still living comfortably.
Let’s say you’re looking to buy a house in five years’ time and the minimum deposit required by your chosen mortgage provider is £44,000. To accumulate that sum, you’d need to put away £733 a month. It might seem a long wait, but imagine putting your key in the front door for the first time, knowing this house is yours and yours alone.
What other costs might I need to factor in when saving?
There are, of course, other costs associated with buying a house that you may wish to factor in to your savings targets. Remember, once you’re living in your new home, you’ll be spending on insurance, utilities and council tax, not to mention furnishing and decorating.
Furthermore, a variety of fees will come in to play before you’ve even set foot in the door:
- Valuation fee: the lender values the property to ensure it’s worth what you’re paying for it. Depending on the terms of your deal and the value of the property, this may not cost you anything, but could cost as much as £1,500.
- Arrangement/product fee: the fee for actually taking out your mortgage. Again, the terms of your deal may mean this costs nothing, but it could cost as much as £2,000.
- House survey fee: the assessment of the property for structural issues and other value-diminishing defects. This could cost anywhere between £350–£1,300.
- Conveyancing fee: hiring a conveyancer or solicitor to handle the legal paperwork of the property purchase. Anywhere between £500–£1,500.
- Money transfer fee: this covers any transfers between conveyancers, lenders, buyers and sellers. Approx. £35. This is usually part of the conveyancing costs.
- Land Registry fee: the Government requires you to register yourself as the owner of the property. The fee depends on the property’s value. This is usually part of the conveyancing costs.
- Buildings insurance: this will cover you if a major issue with the integrity of the property arises. Approx. £300.
- Removal fee: you will need to factor in the costs of hiring a van or removals company to transfer your possessions from the old home to new. This can vary from £100 to over £1,200, depending on the belongings and furniture you wish to take with you and how far you’re moving.
- Stamp Duty Land Tax: this is the tax you pay for purchasing your new home. If you’re a first-time home buyer and the house is worth less than £625,000, you will receive a discounted rate — if it's worth under £425,000, there's no stamp duty to pay at all. Generally, the amount you pay for Stamp Duty depends on the price of the property.
Top ways to save for your mortgage deposit
Once you’ve worked out how much you need to put away every month, ideally using a reputable mortgage deposit calculator, it’s a good idea to work out where you can reduce costs in your day-to-day life.
Perhaps you already have a bank account that allows you to establish a separate pot for your deposit savings. If not, it may be time to open a separate savings account.
One option is an instant access account, although considering it’s likely to be years before you’re in a position to feasibly secure a mortgage, you might instead look at placing your funds in an account that offers more favourable interest rates. And when it comes to finding a little help with your savings, there are lots of options.
Cut down on spending
Implementing small changes across your spending habits can have a marked impact on your savings over time. Regularly casting an eye over your bank statement can give you a clearer, more objective overview of where your money is going — and where it could be saved.
It’s easy to disregard small daily expenses, but they can add up substantially. Perhaps you’re spending £150 a month on going for dinner. Maybe your morning coffee at the station is setting you back a cool £600 a year.
Limit those expenses that aren’t vital to your wellbeing. Treat yourself to dining out somewhere really nice once a month as opposed to spending on four or five casual restaurant meals. Invest in a good thermos and make your coffee at home. You might just be astounded at the savings you accrue!
Earn on what you do spend
Loyalty cards reward regular customers with points to spend on their products or services. You might also consider taking out a cashback credit card, enabling you to earn a percentage of money spent in the form of credit on your bill.
Spending on a credit card responsibly also improves your credit score, which in turn can make you more attractive to mortgage lenders. Just be careful with credit cards, though: the balance needs to be paid off every month, otherwise the interest could end up outweighing the cashback you earn.
Consider a budgeting/savings app
Apps such as Oval and Monzo round up your spending to the nearest pound and deposit the difference into your savings account. Others, such as Cleo, Plum and Chip, analyse your spending behaviours and let you know how much you can afford to spend. Apps such as these sometimes pay no interest or smaller interest amounts that other savings accounts, so it could be a good idea to then transfer the funds into an account that does.
Reduce your bills
Switch your energy bills to a cheaper tariff. Search for more competitive phone and broadband packages. Cancel unused subscriptions that are lying dormant and eating up your funds, such as for streaming services or gym or club membership.
Find additional sources of income
From selling possessions you no longer need to spending some of your free time freelancing, there are many ways to bring in some extra cash each month in order to increase your deposit savings. Just remember to submit a self-assessment tax return for this additional income.
Think about your living situation
Perhaps the most dramatic step you could take to save for your mortgage deposit — and therefore one of the most effective — would be to change your living situation. Moving back in with your parents could mean paying significantly below-market rent (or perhaps none at all if you’re very lucky!), allowing you to save potentially hundreds of pounds a month.
If moving back home isn’t an option, there are alternatives. You could find a lodger or even sublet your spare bedroom, provided your tenancy agreement permits it. You could move in to a flat-share, or even become a property guardian, keeping an eye on a listed building in exchange for extremely competitive rent.
You might also, of course, consider simply moving to a less expensive area. This would mean you’d need to factor in commute costs, as these could ultimately outweigh the savings you make in rent.
If you currently rent a council or housing association property and your annual household income is less than £80,000 (or £90,000 if you live in London), you could be eligible to enter a shared ownership scheme. Purchase between 25% and 75% of the value of your home, paying rent on the remainder. This reduces the size of the deposit you need for your mortgage. You can increase the percentage of ownership up to 75% over time. Once you own 75%, you do not pay rent on the remaining share.
Help to Buy
Help to Buy is a government-led equity scheme that helps prospective homeowners secure a new-build property. You will typically require only a 5% deposit and the developer or government will lend you the rest, up to a maximum of 20%. The loan is interest-free for the first five years.
It's worth noting that the current Help to Buy scheme was originally due to end in March 2021, however it has now been extended until March 2023. The extension of this scheme is restricted to first time buyers purchasing new builds.
Bank of Mum and Dad
Your parents (or other friends and relatives) might be willing to provide you with a cash gift towards your deposit. Most lenders will accept this as a source of funds for a deposit, although there will be extra paperwork such as a declaration from the benefactor that the gift is unconditional. If the gift has to be repaid, then it is a loan. Loans are not usually accepted as a financial source for mortgage deposits as they count as debt, not equity.
Alternatively, friends and relatives can help by acting as a guarantor, thereby accepting liability for the mortgage if you are unable to pay it.
Growing your savings for your mortgage deposit
In order to get the most out of your savings, it’s a good idea to hold them in an account whose interest rate beats inflation. Otherwise, your cash may well lose value over time. Traditional savings accounts are great, but if you’re saving a large sum then you could end up paying tax on the interest it generates.
If you deposit your savings in an ISA then they will be held tax-free. In fact, holding your savings in a Lifetime ISA could see you granted a government bonus of up to 25% of your savings when the time comes for you to buy your home.
You can only use a Lifetime ISA as funds towards a house if you are a first-time buyer (along with additional restrictions). The Lifetime ISA allowance changes each tax year but the limit is currently £4000 per year.
When you are ready to choose a mortgage
You can use a mortgage deposit calculator, to help you objectively consider how much money you could borrow on your mortgage, how much your monthly repayments would be and how much you should be putting down on your deposit in the first place.
When you are ready to compare mortgages we provide concise and impartial advice on how to choose a mortgage, as well as comparisons of low-deposit mortgages. We can help you find a mortgage deal that’s right for you and get on the ladder to securing your dream home!
John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more