Becoming a first-time homeowner is a dream for many Squigglers. Here are some top tips to help you build your first ever house deposit – it may be easier than you think!
If you’re one of the Squigglers who’s got their eye on a house, you’re dreaming big – and we love it!
Buying a home is no small feat, and it’s a big financial commitment for any one of any age. So, it’s important to do your research before making a house purchase (not like one of those impulsive shopping sprees you randomly have at 3am). And that doesn’t just involve quick Google searches and skimming through online articles – a mortgage adviser is probably the best way to go.
The good news is I can give you some basic information around how much you need to save for a mortgage and how you can achieve that deposit savings goal. And if you’re still exploring how mortgages work, check out our blog on mortgages and how you can get one.
How much should you save for a mortgage deposit
So, if you’re familiar with how mortgages work, you know you’ll need a mortgage deposit to buy a house.
A mortgage or house deposit is part of the value of a property that you pay yourself. And you can borrow the rest of the amount you need from a bank or loan provider as a mortgage. You’ll have to pay this back (with interest, of course) over the years, but it’s the most common way people purchase a home.
Now, the deposit you put down depends on a number of factors, including our financial circumstances (we’re not all Jeff Bezos, are we?) and the price of the house you want to buy. Usually, you’d pay between 5% to 20% of the house value as a deposit, but you might decide to put down a larger chunk as your deposit (if you’re a super saver). According to Money Advice Service though, the average UK house deposit for first-time buyers is around 20% (you might want to stay away from looking at London property prices to avoid panic).
So, if the house price is £250,000, a lender may ask for a 10% deposit which is £25,000 and you’ll have to pay that yourself. The rest of the £225,000 you can borrow from the lender and pay back over the years with interest.
Another thing to keep in mind is affordability checks. You can usually borrow four times your annual salary from most lenders, and if four times your annual salary isn’t enough to buy your dream home, you might need to put down a bigger deposit (high maintenance eh).
Now your next question might be – how is the interest calculated? Or how much do I have to pay in monthly repayments? And what happens if I can’t pay monthly?
So, the amount or interest you pay every month depends on your loan to value (LTV) percentage, which literally means the size of your loan relative to the price of the property. In Squiggler terms, that means the higher the deposit you put down, the lower the LTV (because you’re borrowing less), so the less interest you’ll have to pay and vice versa. Don’t worry, you won’t have to do the maths yourself – just use any of the mortgage calculators online to figure out how much and how long your monthly repayments could be for.
Next step: create a mortgage savings plan
Once you know the amount of deposit you’ll need, create a savings goal and start saving up each month.
So, for example, if you want to save £15,000 for a deposit in 24 months, you’ll need to save £625 per month. Now subtract your expenses from your income – do you think you’ll be able to save that amount every month (it might mean you have to cut back Uber Eats)?
If your savings need a little nudge, there are lots of other ways where you can save extra money – reducing bills, creating a side hustle, selling old clothes.
How and where you can save for a house deposit
Once you’ve decided how much you need to save every month, you need a place to put this money (so you don’t “accidentally” spend all of it on a night out).
Savings accounts: You could go long-term or short-term savings accounts. A short-term account may have a lower interest rate, but it will also mean your cash is more easily accessible should you need it. A long-term account can make your money work harder because in exchange for locking away your cash for longer, you get a higher interest rate. You might also want to look at regular savers accounts, which let you save around £50-£500 every month. The main advantage is they tend to return higher interest every month (to go towards the house deposit, and nothing else…) but there may be restrictions on how/when you access your money – so timing is everything.
Lifetime ISA (LISA): You can put a maximum of £4,000 into a Lifetime ISA each tax year and you’ll get 25% on top of that as free money from the government (and all your LISA savings are tax-free hehe). The catch? You have to use the money for a house deposit – talk about strict boundaries.
95% mortgage guarantee scheme: A new government-backed mortgage scheme can help you secure a mortgage with just a 5% deposit! The government will offer lenders the guarantee they need to provide mortgages that cover the other 95%. But remember, you may face a higher interest charge, so larger mortgage repayments, the smaller your deposit.
There are more government schemes out there that could help you reach your deposits goal. Read our full blog on getting onto the housing ladder.
Bank of Mum and Dad (or BOMAD as the industry calls it): The Guardian reported that nearly one in four house purchases were backed by financial help from parents. And that doesn’t always have to be gifting money to kids (although that’s probably the most convenient route). Parents can also act as a “guarantor” for a mortgage, which involves putting down their home or savings as collateral – that means if you can’t make your repayments, your parents will be responsible. Or they could take out a mortgage with you which means you’d both own the home – that also means you’re both responsible for mortgage repayments (yes, both, you can’t always pass the buck to mum and dad!).
What if I can’t keep on top of my monthly repayments?
Well, the straight answer is you’ll probably lose your home.
Thinking about that sucks, but it’s important to think about these worst case scenarios. What if you couldn’t work for a while because of illness or an accident, so you stopped earning for a bit? Your expenses and mortgage aren’t going to stop because your income has. Or if you’re still building your house deposit, you don’t want to dip into those savings when you can’t work.
One financial product that could help you is income protection insurance – it basically replaces your income when you can’t work due to illness or accident for as long as you need it (lifesaver). So you won’t have to eat up your savings and you’ll be able to keep up with your mortgage repayments. Find out more here.
Nothing is impossible – even a Squiggler buying their first home! We’ve gotchu, fam.