If you pay rent every month – and simply end up paying off someone else’s mortgage, then you may well have considered entering the property ladder yourself and saving for a mortgage.
However, this can seem like a tough task, as you will need to consider mortgage deposit saving – before even applying to a mortgage lender.
First-time buyers without any real capital behind them will find it even tougher to save for a mortgage. The first rung of the property ladder is always the hardest to get on.
Your mortgage deposit
Saving for a mortgage deposit is the main thing you will need to think about. A mortgage lender will generally require you to pay a deposit of 5% of the property minimum – they will then lend you the rest of the money to cover the remaining funds.
First, you need to look through property websites to see how much the properties cost in the area you are thinking about buying, then you can work out how much you will be able to borrow towards the cost.
Most mortgage lenders base how much they are prepared to lend you on the amount of money you earn – so the less you earn, the less they will lend you – so you might need more than a 5% deposit in this instance. If you buy with a second party, then there is more earning potential so you will be able to get a larger mortgage – and probably build up a bigger mortgage deposit as well.
Other buying costs
Unfortunately, buying a house costs a lot more than just a mortgage deposit and monthly repayments. There are lots of other costs:
- Valuation Fee: a mortgage provider like Mortgage Advice Bureau conducts a valuation on your chosen property to see if its market value is equal to the amount of money you are paying for it. This can cost up to £1500 depending on the price of the property.
- Affangement/Product Fee: You might be charged for taking out the mortgage. This could be anywhere between £0 to upwards of £2,000.
- Survey: You will need to get a professional to survey the property to see if there are any structural defects. Depending on the type of survey you go for, this can cost you to £1,300.
- Conveyancing Fees: You will need to appoint a solicitor or conveyancer to look after the legal aspects of buying your property, which is generally a cost well over £1,000.
- Search Fees: This is a search for anything that might affect the property negatively, such as blood risk etc. This usually costs £200 – £400.
- Buildings Insurance: Before you buy any property, you will need to make sure it is insured. Depending on the value of the house, it can cost upward of £120 p/a.
- Money transfer costs: You need to pay for any costs of transferring the money between buyers, sellers, mortgage lenders etc which costs around £35.
- Land Registry: You will need to pay to register yourself as the new homeowner, which can cost up to £140.
- Removals: You need to pay for a removals company to move your stuff to your new property. If you have a lot of stuff, this can cost anywhere close to £1,000.
- Stamp duty: Although some first-time buyers may be exempt – and some with a lower property price are excluded, stamp duty can add thousands to the costs.
6 Ways to save for a mortgage deposit
When saving for a mortgage deposit, you need to put into place a plan for how much you need to save every month – and how you will manage this figure…
1. Cut the cost of bills
One of the best ways for first time buyers to start to save for a mortgage is by cutting the cost of your outgoing bills. Ways to do this include – switching your energy provider (if permitted by your landlord). Look for a cheaper mobile phone and broadband contract. Check to see if your council tax is the correct band – or look to see if you are eligible for a discount for a single residency. Also, cancel any subscriptions you don’t use or need… such as gym, music, television etc.
2. Reduce your daily spends
Small changes can make a big difference in the long term when you begin to save for a mortgage. Look through your bank statement and see where your money is going.
It might be a cliche but making small changes to your everyday outgoings really can add up over time. Maybe you can cut down on your daily cappuccino or latte. Maybe you could cut back on your clothes allowance etc. These areas that you identify can end up being impressively large annual savings.
3. Make use of loyalty cards and cashback
With loyalty cards and cashback, you can start earning back a percentage of your spending. Use your cashback card for all your spending but be sure to pay the balance off every month to avoid interest – which would outweigh the benefits of cashback. Moreover, if you can use a credit card responsibly – and make regular monthly payments or pay it back in full every month, then it will improve your credit score which will help you when you apply to your lender.
4. Download a savings spp
There are now several different savings apps that allow savers to funnel away their spare money and help you to build your funds for a deposit. Some apps round up your spending to the nearest pound and the additional money is saved.
There are other apps that use an algorithm to analyse your inputs and outputs to see how much you can spend whilst still saving. However, these apps generally don’t pay interest on your savings, so you should then transfer this money to a savings account that does.
5. Look for cheaper rent
Although this is pretty drastic, as it would mean potentially moving home, you can save lots of money by dropping your rent monthly payments. This is why lots of people looking into home ownership move back to live with their parents.
Paying rent is often a big chunk of their outgoings. This will, at least, mean below market rent rates – or even none at all if you are lucky! It also usually means lower food and household bills, so you can reach your saving goals more quickly.
This won’t work for everyone, but if it is an option, then it’s worth considering. Another option is by getting a lodger if you live alone. However, you will need to check your tenancy agreement. You could also consider a flatshare as an alternative.
If you like your own space, then you could choose to move to a cheaper area – although this might mean extra travel costs and longer commutes, which may outweigh the benefits.
6. Find another source of income
You can also work on how much you earn as well as how much you spend as a way to boost your savings.
There are lots of ways to do this – doing some freelance work in your spare time, selling bits and bobs on eBay or Etsy – or setting up your own online shop.
However, any second income will need to be declared, so you will need to complete a self-assessment and pay tax on your extra cash.
ISAs: Help to Buy or Lifetime
Sometimes an instant access savings account doesn’t give you much in terms of interest, so you might consider putting the money into an inflation-beating account so that it doesn’t end up losing value.
Although for most, there’s nothing inherently wrong with a standard savings account, if you save a lot of money, then you will need to pay interest generated if it is over a certain amount.
However, if you open an ISA, then your savings – and interest generated, remains tax-free. Government schemes have been created to help. If you open a Lifetime ISA or Help to Buy ISA, then you can even benefit from up to 25% in government bonuses on your savings to go towards your property if you are a first-time buyer.
However, for now, the Help to Buy ISA scheme is closed to new applicants – although if you already have one, then you can continue to use and benefit from them up until the end of 2030.
Before opening an ISA, make sure you compare the different types available on the market so that you can choose the best one for you.
Banks often encourage you to open a regular savings account by paying attractive rates – and this is an excellent way to encourage you to put your money aside regularly. They might only allow you to withdraw money a set number of times per year.
You might also get less interest if you don’t save every month. You also might be required to have a standard current account with the provider.
Help to buy equity loan scheme
Another government scheme is a help to buy equity loan. If you have managed to save your deposit but still can’t afford a mortgage loan for the property prices in your preferred area, then you can consider a Help to Buy equity loan from the government.
Simply put down a 5% deposit and the government will loan you a set amount of funds – and you can take out a mortgage for the outstanding amount.
How much the government will lend you depends on where you live – London residents can get 40%, the rest of England and all of Wales is 20%. Scotland residents can get 15%. However, these are for new build homes only.
Investments when saving
Ultimately, the best way to save money for your deposit is by making every penny count. Because savings rates are still very low, you may opt to steer clear of a traditional savings account and invest in a stocks and shares ISA to get a better return.
However, there is still risk attached – as your investments can fall in value as well as rise. You do, of course, have the possibility of getting better returns than from a bank – but you might also do worse as well. A fall in the stock market can take years to recover and set you back years in a worst-case scenario.
Your tick list for property saving
If you are looking to start your journey into home ownership, then while you are savings, here are other areas you will want to get in order to improve your chances of acceptance:
- You are favoured if you have had long term employment and regular income.
- Make sure you have a good credit history
- Be registered on the electoral register.
- Have your paperwork in order
Of course, you can still get a mortgage if you are self-employed, but it’s just a little bit more difficult to get a fair market rate.