It’s never been easy saving money for a mortgage deposit on a house. But it seems to get more difficult for each successive generation. We will look at the process of buying or selling a house and give you some guidelines on how best to go about it.
The process of buying and selling houses
For most people, buying or selling a home is one of the most stressful things they will ever do. Unfortunately, a house purchase has been made even more difficult by the onset and continuance of the Coronavirus pandemic.
However, having a thorough understanding of the buying and selling process will help to smooth things out a little. We hope that you’ll be a little wiser and a lot less fraught by the time you finish reading through this blog.
Understanding the basics
To start with, it’s a good idea to get an idea of the timescale you’re talking about when buying or selling property here in the UK.
Finding the right property is, of course, the most important thing. You’re not going to start buying, for example, until you know that the property is right for you. It has to be in the right location for things like schools if you have young children, shopping facilities, and other amenities like doctors and dentists, and easy access to public transport if you need it.
It can take countless weeks to find the perfect home, but you’re only halfway there once you’ve done that. For example, securing a mortgage can take up to six weeks, while organising a survey takes four weeks. Then you’ve got to wait for your solicitor to go through the legal process before you can exchange contracts and eventually get to completion.
Altogether, it can take several months, and there’s no point in getting stressed out about it, although you probably will. But of course, before you can jump on the bandwagon, you need to know how to save for a house deposit, and that’s what we intend to help you with, well, at least from an ideas point of view.
How much do you need to save for a house deposit?
It used to be that you needed to have a 10% deposit to secure a mortgage. However, you can get mortgages up to 95% of the value of the property you hope to buy, so you will need to aim to save enough money for a 5% deposit. So let’s look at that in cold cash terms if you’re buying a property for £200,000.
- For a 5% deposit, you will need £10,000
- For a 10% deposit, you will need £20,000
- For a 15% deposit, you will need £30,000
Of course, the more deposit you can afford to put down, the smaller the mortgage you will take out, which can mean considerably smaller repayments.
How to go about saving for a house deposit
How to save for a house begins with having a budget. If you’re serious about saving, you’ll have to lay down some ground rules, and the best approach is to create a budget. If you don’t, you’ll only save what you can afford, and that frequency won’t be enough, especially if you regularly allow yourself some treats.
Lay down the budget that includes all your cost of living expenses plus a little extra for unexpected emergencies. Be strict with yourself and then stick within the budget, no matter what. As they say, there’s no gain without pain, and once you’re on the property ladder, that pain will be well worth it.
Reviewing your renting situation
One of the top tips for saving for a house is to reassess your renting situation if indeed you are renting. Saving for a house is one of the most challenging things you will ever do financially because you need to set a substantial amount of money aside. You’ll slip further and further behind the mortgage train if you don’t, and it’s more like an express train than a commuter train.
If you’re keen to carry on living on your own, you might want to consider moving to a cheaper area, although you will need to keep an eye on travel costs if you do
You can always consider taking in a lodger or two to help with the bills, but you will need to first check this out with your landlord.
If all else fails, you could consider moving back to live with mum and dad. It is one of the best ways of saving money for a house; when it comes to how to save for a house on a low income, there probably isn’t a better way.
Boost your income
Nobody said saving for a house would be easy, and you may need to consider boosting your income by taking on additional work or getting a side hustle. You can do this in various ways, such as freelancing in your spare time, getting a job waiting on tables or working behind a bar, setting up an online store, or simply selling stuff you no longer use. Of course, the more you earn, the more you can save.
Just be a little careful with your income tax. You may be required to submit a self-assessment tax return form regarding any extra money you earn.
Automate your savings
Another way to learn how to start saving for a house is to automate your savings. They now have things called autosaving apps, which use clever technology to calculate how much you can afford to save. Once they’ve done that, they move the money automatically from your bank account into a virtual savings account.
The idea behind the concept is that you can start building up your savings without hardly noticing you are doing so.
Some of these apps work out how much you can afford to save weekly, while others work on a rounding-up principle whereby they round up the cost of your purchases to the nearest pound and save any change left over.
These apps include Chip, Plumb, and Moneybox. Unfortunately, some say that they are something of a gimmick. You are unlikely to be able to save anywhere near enough with an automated savings app, but you know what they say?- Every little bit helps!
Make your savings work for you
When you’re saving for a house deposit, it’s vital to ensure your savings are working for you. Simply putting your savings into an ordinary savings account will not cut it. It won’t even keep up with inflation. Instead, you need to invest the money to get a better interest rate.
Saving money to buy a house with an ISA
ISAs are an excellent method of saving to buy a house. They are tax wrappers which means your savings and growth will be tax-free if you stick within your ISA allowance.
If you’ve already got a Help to Buy ISA, you can save £200 per month into it, and the government will give your top-up of 25% up to £3,000 when you purchase your first home. If you’re saving with a partner who also has a Help to Buy ISA, you both get the 25% bonus.
Unfortunately, taking out Help to Buy ISAs was stopped on 30 November 2019, although if you currently have one, you can continue saving into it until November 2029.
Now, the best way to save money for a house via an ISA is with a Lifetime ISA (LISA). You can invest up to £4,000 a year into a LISA until you’re 50 years of age. You must begin paying into it before you’re 40.
With the old Help to Buy ISA, the government adds a 25% bonus to your savings, while you get a maximum of £1,000 a year with a Lifetime ISA account. Again, it’s a significant improvement over the Help to Buy option.
Don’t just save – Get prepared
Knowing how to save for a house deposit is one thing, but it’s also a good idea to prepare yourself when you have enough saved to look for a mortgage actively. You will find that mortgage providers are more likely to make you an offer if you:
- Are in long term employment and have a history of a regular income
- Have a good credit score
- Have your name on the electoral register
- Have all your paperwork ready
Having all of the above in place will be a big help. It doesn’t mean to say that you won’t be able to get a mortgage offer if you happen to be self-employed or you’ve got a poor credit rating. However, it will make it more challenging to get an offer at a decent rate.
Look out for new mortgage product offers
The mortgage market is unpredictable, so it’s a good idea to keep an eye on the best mortgage rates, monthly updates, and the latest mortgage product offers.
The restrictions on lending are more demanding than they were a few years ago. As a result, mortgage providers are becoming much more innovative with their products to get around this.
A little about LTV mortgages
If you are struggling with saving to buy a house and seem to be getting no closer to that 5% deposit you need, you might be able to get your foot on the ladder with a 100% LTV (Loan to Value Ratio) mortgage. This type of mortgage is also known as a no deposit mortgage.
An LTV mortgage is all about the size of the mortgage compared to the value of the property. So If, for example, you want to borrow £180,000 to purchase a property worth £200,000, then the LTV is 90%.
Generally speaking, the greater the LTV, the more expensive the mortgage. The best mortgages tend to be based on LTV’s of 60% or lower. LTV lenders consider that the higher the LTV, the higher the risk.
If you can only afford to offer a deposit that represents only a tiny percentage of the property, you will not be considered as safe a bet as someone who can lay down a larger deposit. The smaller the mortgage, the more likely the lender can recover their money when the property gets repossessed in a worst-case scenario.
It all comes down to having as much deposit as possible. The lower the LTV, the cheaper the interest rate, and although a fraction of a percentage point might not seem much, it can save you tens of thousands of pounds over the entire course of, say, a 25-year mortgage.
But if you can find an undervalued property, a 100% LTV mortgage could be an option.
When it comes to asking yourself the question of how much should I save for a house, it becomes clear that the more deposit you can save, the better it will be for you in terms of repayments in the long term.
The bank of mum and dad
If you’re lucky enough to have reasonably wealthy parents, then the bank of mum and dad will always be your best option. Today, an increasing number of people are going down this route, but it’s not for everyone.
Your parents have probably struggled considerably to set aside their nest egg and may not be willing to hand over their savings. However, there are other options whereby some lenders could be willing to take out an additional charge on the parent’s property as a form of safeguard.
How to start saving for a house
Investing is the best option in respect to knowing how to save for a house in the UK. Yes, there is always a risk with investing, but that risk reduces significantly when the investment is long-term, as, of course, it will be because the answer to ‘how long does it take to save for a house’ is years – probably over five years at least.
As explained earlier, a Lifetime ISA is one of the best options, but a Stocks and Shares ISA is another. The other thing that reduces risk apart from investing long-term is diversifying your portfolio, which you can do when investing in this type of investment ISA. So, why not contact a Moneyfarm consultant for some free, no-obligation advice?
*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.
