How To Save Money For a Mortgage Deposit

How To Save Money For a Mortgage Deposit
Home Blog How To Save Money For A Mortgage Deposit
Mark Langshaw

Author: Mark Langshaw

Content Manager

Updated: April 9, 2024

Saving for a deposit can be one of the hardest parts of getting on the property ladder. The task can seem overwhelming, especially with the rising property prices across the UK.

Yet, with a clear strategy and disciplined approach, accumulating the necessary funds becomes an attainable goal. This article delves into practical and effective methods to help prospective homeowners save for that all-important deposit.

We explore a range of strategies, from budget adjustments and expense reduction to increasing your income and leveraging savings schemes. Each method is designed to not only accelerate your savings rate but also enhance your financial health, making you a more attractive candidate to lenders.

By adopting these approaches, you can systematically build up your deposit, bringing you closer to purchasing your home. Whether you’re starting from scratch or looking to boost your existing savings, these tips are geared towards making your path to homeownership a little smoother and more straightforward.

Visit the deposits section of our website if you’d like to understand more about the technicalities of the rules around mortgage deposits. From information about the required proof for deposits to information on gifted depositsconcessionary purchases and when you can use a loan to cover your deposit.

How to save for a deposit

Saving for a mortgage deposit can be a daunting task, but with strategic planning and discipline, it’s entirely achievable. Here are five practical tips to help you efficiently accumulate the funds needed for your deposit.

Set a clear savings goal

Start by determining how much you need to save for your mortgage deposit. This typically ranges from 5% to 20% of the property’s value, depending on the lender’s requirements and the type of mortgage you’re seeking.

Use our mortgage calculators to get a rough idea of the properties in your desired area and their costs, then calculate your target deposit. Having a clear goal not only provides motivation but also allows you to plan your savings strategy effectively, considering your time frame and the monthly savings needed to reach your target.

Once your goal is set, create a dedicated savings account for your deposit. Look for accounts with higher interest rates to maximize your savings. Setting up a direct debit to transfer a fixed amount into this account as soon as you receive your salary can help make saving a priority rather than an afterthought.

Watching this account grow over time can be incredibly motivating and helps keep your eye on the prize — your future home.

Reduce monthly expenses

Audit your monthly spending to identify areas where you can cut back. Common areas for potential savings include dining out, subscriptions you rarely use, and high-cost utilities.

Switching to cheaper alternatives or eliminating non-essential expenses can free up significant amounts each month that can be redirected towards your savings. Even small reductions in spending can add up over time, contributing substantially to your deposit fund.

Consider using budgeting apps to track your spending habits and set monthly limits for different categories. Being mindful of where your money goes each month can reveal surprising opportunities for savings.

Periodically reviewing your service providers (such as internet, mobile phone, and utilities) to ensure you’re getting the best deal can lower your monthly outgoings without sacrificing the quality of services you receive.

Increase your income

Look for opportunities to increase your income through overtime, a part-time job, or freelancing. Even temporary income boosts can significantly accelerate your savings timeline. If you have a skill or hobby that can be monetised, consider using it to earn extra cash.

For example, if you’re good at photography, graphic design, or crafting, platforms like Etsy or freelance job sites can provide useful additional income.

Another avenue is to sell items you no longer need or use. Online marketplaces, car boot sales, or local selling pages can be great places to declutter while boosting your savings.

Not only does this generate extra cash, but it also simplifies your life and reduces the amount of stuff you’ll eventually need to move to your new home.

Utilise savings schemes

Take advantage of government savings schemes designed to help first-time buyers save for a deposit. The Lifetime ISA (LISA) allows you to save up to £4,000 each year, with the government adding a 25% bonus to your savings, up to a maximum of £1,000 per year.

This scheme is specifically designed to help you buy your first home or save for retirement, making it a powerful tool to save for a deposit.

It’s also wise to regularly review your savings strategy to ensure you’re maximising your returns. Interest rates and savings schemes can change, so staying informed and ready to switch your savings to a more beneficial account or scheme can make a big difference over time.

Financial advisors or online financial resources can offer guidance and updates on the most effective saving strategies and products available.

Reduce Debt

Paying down high-interest debt, especially on credit cards or personal loans, can significantly improve your financial situation and ability to save. The interest paid on debts can often surpass what you might earn through savings, so tackling this first makes financial sense.

Reducing your debt-to-income ratio can enhance your mortgage application, potentially giving you access to better mortgage deals.

Consider using the snowball or avalanche methods to pay off debts. The snowball method involves paying off your smallest debts first, gradually working up to the larger ones, while the avalanche method focuses on paying off debts with the highest interest rates first.

Both strategies can be effective in reducing debt and freeing up more money for your mortgage deposit, so choose the one that best fits your personal preferences and financial situation.

Get help from the government

Equity Loan

The government Equity Loan scheme was introduced to help first-time buyers get onto the property ladder with a larger deposit.

Essentially, if you have a 5% deposit, the government could provide a further loan of up to 20% through the Homes and Communities Agency (HCA).

This gives lenders the peace of mind to lend larger mortgages and with a combined deposit of up to 25%, you will then have access to more attractive mortgage rates from lenders participating in the scheme.

Key points you should know about Equity Loans

  • For the first five years, an Equity Loan is interest-free
  • In year six, you will be charged 1.75% which will climb at a rate of 1% of that figure plus any increase in inflation
  • You can choose to repay the equity loan at any time, without penalty
  • You can pay back either 10% or 20% of the total amount, so long as the loan is worth at least 10% of the value of your home

Shared Ownership

If you are still unsure whether you can afford to save a large deposit, Shared Ownership may be an option for you.

This government scheme allows borrowers to buy a percentage of a property (between 25 and 75%) and pay rent on the share that they do not own.

Although you will be required to pay a 10% deposit, the amount you pay is significantly reduced as you will need a smaller mortgage.

For example, if you want to buy a home worth £200,000, you could buy a 25% share (£50,000.)

A 10% deposit would be £5,000, meaning you would need a smaller mortgage of £45,000.

Key points you should know about Shared Ownership

  • The rent on the unsold share is capped at 2.75% of the property’s value
  • You may also be required to pay a service charge
  • You can buy more shares in the property if you can afford to in the future
  • You cannot have a gross household income of more than £90,000 a year
  • You cannot already own a home
  • Priority applicants include those who live or work in the local area and Armed Forces personnel

Get confidential advice

Navigating your way through your options can be overwhelming but some services and groups offer free advice on savings, money and mortgages.

These include:

And, of course, we are always happy to help with any queries regarding mortgage deposits.

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