Saving for your first home mortgage deposit can be confusing and daunting. It helps to set a realistic goal and a step by step plan to achieve it.
How much should you save?
Your first step is to determine an amount to save towards.
The minimum deposit for a mortgage is 5% of the home cost. However, in reality, the average first time buyer deposit in the UK is around 15%, which equates to an average house deposit of £33,000 outside of London and about £115,000 in London.
Once a deposit is down the rest can be covered by a mortgage loan from a bank or building society.
You will then spend years paying back the mortgage amount (plus interest) in monthly instalments. This is why it is always better to pay as much in your deposit as possible: you will owe less each month to your mortgage lender.
Run the numbers for an average mortgage deposit
To calculate how much deposit is needed for a house and how much you will need to pay each month after, you want three numbers:
1. Look up the average cost of properties in the area you want to buy. Use this area comparison tool to find that number.
2. Then use a borrowing calculator to see how much mortgage you can get for it.
The difference between #1 and #2 is roughly what you need upfront at a minimum.
3. Using the #2 figure, you can then use this mortgage payment calculator to see what your monthly payment might be.
Mortgage lenders will want assurance that you are capable of paying off #3 each month. If you can’t prove that, they will loan you less, which means you need a greater deposit.
It’s worth adding that in some areas it’s normal to pay over the home valuation price. Mortgage providers, however, provide mortgages based on home valuation, not the ultimate purchase price. Anything over the home valuation must come from your pockets as part of the down payment.
Don’t forget the extra costs
First time buyers often learn the hard way that the mortgage deposit is really only the beginning of upfront costs when purchasing a house. Unfortunately, extra fees will come from all sides and add up. A mortgage will not help you cover any fees.
Other fees like land registry fees, valuation fees, house survey fees, and buildings insurance fees may also be added to your bill. You will have to hire a solicitor to handle the purchase (conveyance fees range), and they will be able to tally all these expenses for you.
What if that number seems overwhelming?
If the total you need to save seems overwhelming, don’t despair. You just need a strategy. It may take many years, but that is normal.
These four steps will help.
Reducing the cost of your current living situation
Sometimes you need to take a step back in order to make a leap forward. Look for ways you can reduce the cost of your current living situation. For example, co-rent or move home to a cheaper area for a defined period. Move back in with your parents if that is an option.
Whatever you do, make sure that any savings from the home changes are put aside for your deposit goal (and not repurposed for a holiday!).
Create a Savings Plan
In addition to reducing your cost of accommodations, you want to reduce unnecessary expenses.
Then put the saved money into appropriate places, such as a lifetime ISA, invested in the stock market, or a place where it can safely sit and gain interest like a savings account.
Utilise Government Schemes
You might be eligible for a government grant or scheme to get onto the property ladder.
For example, a Help to Buy equity loan lends up to 20% of the cost of a newly built home. In London, where property prices are higher, this can be up to 40%. This grows your available first time buyer deposit and reduces the mortgage you need from a bank. This loan is interest-free for five years.
A Help to Buy Shared Ownership scheme is another source of support. This lets you buy a portion of a new-build property and pay rent to a housing association on the rest. You can gradually buy more ownership in your property and “staircase” to 100% ownership.
If you are fortunate to have family able and willing to help with your mortgage deposit, strongly consider their offer.
They may also be to help you get a guarantor mortgage also known as a springboard mortgage. This is when a family member contributes some savings or uses their own house as security. However, this is a big ask. If you miss a payment they are responsible for the shortfall and significant credit score damage. Read more about the risks here.