Getting onto the property ladder can seem daunting.
Not only do you have to consider where you want to buy and what sort of property you want to live in, but you need to make sure your finances are in good order if you want to secure a mortgage.
Building up a sizeable deposit can boost your chances of being accepted, but that’s often easier said than done, especially if much of your income currently goes on rent.
Here, we explain how much you should aim to save, and some of the things you might be able to do to reach your goal more quickly.
How much am I likely to need?
The minimum deposit you’ll need to save is 5% of the value of the property. That means if you’re buying a property costing £200,000, you’ll have to put down a deposit of at least £10,000, rising to £15,000 if you’re buying a home costing £300,000.
If you’re able to save more than 5%, this will give you access to a wider choice of mortgage deals. That’s because mortgage lenders tend to reserve their best rates for people with bigger deposits as they consider them to be lower risk.
Having a bigger deposit has other benefits too. The more you can afford to save, the less you’ll need to borrow, which means your monthly repayments will be cheaper.
Don’t despair if you can’t save more than 5% of the property value though. There are still plenty of mortgages available to those with smaller deposits, and competition is strong amongst lenders in this area.
Bear in mind too that there’s also the Help to Buy equity loan scheme for buyers with small deposits. This is available if you’re buying a new-build property costing up to £600,000. You only need to put down a 5% deposit, and the government will then lend a further 20% of the property price interest-free for the first five years, rising to 40% for those buying in the capital.
This scheme will continue until April 2021 in its current form. After that, it will be replaced by a new Help to Buy equity loan which is only for first-time buyers and will run for two years until March 2023.
Understanding the jargon
The amount you put down relative to the value of the property you’re buying is usually expressed as the ‘loan-to-value’ or LTV. For example, if you’ve got a 5% deposit, you’ll be restricted to mortgage deals at 95% LTV, whereas if you’ve got a 20% deposit you can look for deals at 80% LTV.
You can use our mortgage calculator to help you work out how much you’ll need to borrow based on your individual circumstances, and what you’ll need to pay back.
Bear in mind that whilst saving as big a deposit as you can is a priority; you’ll also need to budget for all the costs of buying a home, such as conveyancing and moving.
First-time buyers in England and Northern Ireland don’t have to pay stamp duty on homes costing up to £300,000, or on the first £300,000 of properties up to £500,000. You can read more about Stamp Duty Land Tax and use our calculator in our guide ‘Stamp Duty Explained’.
Find out more about deposits and additional costs to keep in mind in our guide to deposits for first time buyers.
Ways to boost the amount you save
There are several things you can do to build up a deposit more quickly.
• Make use of government savings schemes: You can pay a maximum of £200 a month into a Help to Buy ISA, except for the first month you open the account, when you can pay in up to £1,200, and the government will top up any contributions made by 25%. The maximum bonus you can receive is capped at £3,000. The proceeds of a Help to Buy ISA can be used to purchase a property up to the value of £250,000, or £450,000 if you’re buying a home in London.
Alternatively, with a Lifetime ISA, you can contribute up to £4,000 per tax year from the age of 18 up to 50, and again the government will add a 25% bonus every month to any contributions you make, paying in up to £1,000 a year on your behalf. You can either use your Lifetime ISA to save for a property deposit, or you can save for retirement, or both.
The maximum bonus the government will pay is £32,000. Money held in your Lifetime ISA can be used to buy a property costing up to £450,000. You can save into both types of account if you want to, but you’ll only be able to use the bonus from one to buy your first home.
• Live at home with parents to keep costs down: Living with your parents while you save for your deposit is something many first time buyers do nowadays. Not only does it reduce your outgoings, allowing you to save for a bigger deposit, but it also means you’ll have more flexibility when it comes to deciding the right time to buy.
• Get help from the Bank of Mum and Dad: Another factor which can have a huge impact on how soon you buy is if you’re lucky enough to receive a loan from family to provide you with the deposit to enable you to buy a home sooner – or even the gift of a deposit.
Several lenders also now offer mortgages which are specifically designed to factor in financial support from parents. These include deals which enable buyers to take out a mortgage without a deposit, provided parents keep a percentage of the property price in a savings account, and mortgages that allow parents to borrow against equity in their home. These funds can then be given to their children to be used as a deposit.
What if mortgage rates rise?
The prospect of higher mortgage rates can be a real worry if buying your first home is already a financial stretch.
Interest rates are currently very low, but of course no-one knows how long they will remain at this level, so it’s important to consider the financial impact a rate rise could have on your mortgage.
If you’re worried about how you’d cope with steeper monthly payments, locking into a fixed rate deal may provide you with peace of mind that even if rates do go up, your monthly mortgage costs will stay the same.
Always seek advice if you need help finding the best deal based on your individual circumstances.
What First Time Buyers should know about saving for a deposit