It’s the burning question on every first-time buyer’s lips – how much should you save for your deposit?
Granted, there are likely many other “big” questions to consider when embarking on the huge step of getting a mortgage and buying a home. But with UK Savings Week currently in full swing, it seems like the perfect time to take on a deposit-saving poser to be reckoned with.
Whether you’ve already started building a savings pot for your home, or you’re thinking about taking one out, your strategy will inevitably include filling your bank to the brim.
There is some good news about this. Interest rates are rising – with expectations they will rise at least once, if not twice. This bodes well for savings, if not for mortgage rates.
This means there will be higher interest rates available on savings accounts, which is a great starting point.
But, how much should you save, and what does smart saving look like? Do you really have to give up your favorite daily coffee and sacrifice it in the name of home ownership?
Here are some answers to the most frequently asked questions about deposit savings
1. How long will it take me to save the deposit?
The answer to this question depends on many factors, including how much you need to save (see tip 2) and how much money you can save. This will ultimately be affected by your income and the location where you want to purchase.
Rachel Springall, financial expert at Moneyfactscompare.co.uk, said it could take several years for many aspiring homeowners before they have enough.
Quoted Financial Supervision Authority Just over two in five (42%) of aspiring first-time buyers take five years to build up a large enough deposit, the data revealed.
Some of you will have family support and some will not – and this can make a big difference. In either case, obtaining a Lifetime Savings Account, which currently offers a 25% government bonus, can help speed up the saving process, as can choosing the right savings account.
We will delve into this later…
2. How much do I need to save for my deposit?
Some people start saving by simply setting aside any excess cash available after bills, shopping, and other monthly costs. But at some point you will need to calculate the amount required to make a sufficient or decent deposit, and for this you will need to decide on an approximate budget for the price of the house.
According to Springall, a 5% deposit on the current average UK house price of £272,000 would be around £13,600.
But this is the UK-wide average – look more locally and you’ll find that the deposit amount varies widely. In London, where the average price is £554,000, a 5% deposit would be £27,700. Meanwhile, in Yorkshire and the Humber, where the average price is £208,000, a 5% deposit would be £10,400.
Springall advises taking other costs into account. She explained: “You also need to cover any legal fees, the valuation and survey, as well as conveyancing costs, which can range from £1,500 to £5,000 for the purchase, depending on whether this is a lower or higher final move, or a basic or full survey, so an average range would be £3,250.
“As a rough average, the total amount needed to cover all costs is around £16,850, so if the plan is to save this amount over five years, you need to save £280 every month. However, the right calculation and determination to increase this amount can radically change the time it takes.
Side note on deposit amounts
A 5% deposit means you can get a mortgage at 95% of the property’s value – also known as 95% loan-to-value (LTV). Most brokers recommend a 10% deposit but this is not always practical in these days of rising house prices.
A number of lenders now offer mortgages to those with smaller deposits and, in some cases, No deposits. These can be great options for those who are struggling to save but have a good income, but it’s a good idea to seek advice from a broker to help you navigate these trades and discuss the potential risks.
3. What savings account should I take out?
Choosing the right savings account is key. Price is important, of course, but you should also make sure you choose the right account type.
Easy access accounts or regular savings accounts are a good place to start because they usually require small deposits and you can access the funds at any time if you want to move them to a better account. Interest rates tend to be variable, so, if interest rates fall, your savings rate will also fall. Watch out for bonus rates that only last for 12 months.
Fixed-rate accounts offer guaranteed interest for a specified period of time. These tools are great for transferring a lump sum accumulated into a regular saver and generally offer higher rates than are more accessible. But you’ll need to be comfortable securing your money while it matures in the background.
“Because the deposits you might put aside each month are different, for example, if you hit an unexpected bill, an easy access account may be the most flexible option,” Springall said.
“Another option might be a notice account, but these have different restrictions or access limits, so may not be suitable if you suddenly need your home deposit straight away.”
However, Springall’s top pick for all aspiring homeowners is the Lifetime ISA.
“(It’s) a premium option, thanks to the bonus the government pays when you buy your first home,” she said.
“If a better rate comes up elsewhere while you’re saving, you could consider an ISA transfer, just keep in mind that not every provider allows this option.”
How can you use a Lifetime ISA to reach your house deposit goal sooner? If you’re eligible, open a Lifetime ISA early – 18 is the minimum age – as it must be open for at least 12 months before you can use it to buy your first home, Springall explained.
She added: “Save what you can each month, up to the annual limit of £4,000, and the government will add a 25% bonus, up to £1,000 per year.
“If you contribute the maximum over three years, you could create a pool of £15,000, which includes £3,000 in bonuses.”
The Lifetime ISA is currently under review because the government plans to replace it with a first-time buyer ISA.
If you don’t have a Lifetime ISA yet, the advice is to open one and put down the minimum amount (£1) to keep it active. This way you won’t lose it when the proposed new version is launched.
4. How can I save as much money as possible?
Set yourself up for success by establishing lots of positive savings habits into your daily life.
Start by setting up a standing order so that a specific amount is transferred to your savings account on payday without you having to think about it.
Check your rate regularly to make sure you are getting a return above inflation and then check if there are any better rates in the area.
If you receive any additional income – a pay rise or bonus for example – transfer it to your savings immediately.
Samantha Coulthard, Director of Savings and Current Accounts Products, at Cumberland“You’re used to the old amount, so you won’t miss out on money you haven’t earned yet,” he explained.
She also offered some other ways to save, including running a no-spend week a month
“Choose a week where the only spending allowed is bills and essentials. This won’t make you rich on its own, but it’s a quick way to notice where your money quietly disappears during the rest of the month.”
Cutting spending is also a useful way to free up extra money to put into savings.
This doesn’t always have to involve giving up your daily coffee, either. Getting a subscription or shopping around for a better broadband deal can be just as lucrative. As is ‘downgrading’ when buying – which means looking for cheaper options in the supermarket or swapping High Street for Vinted when you go clothes shopping.
Look at where you might be overspending or you could make a swap and pocket that money. With the extra interest, it can make a big difference to your savings balance.
You can find more tips on how to save on our sister site, Money pages. break
