Of the many obstacles that first-time buyers face when trying to get their first foot on the property ladder, one of the most difficult is saving for the initial deposit.
As more Britons hope to buy their first home, consumer credit expert Paul Wilson shares his advice on how to save for a home deposit.
Know how much you need to save
The first step is to figure out how much you can actually afford to spend on a house based on your income. You can do this informally yourself using an online calculator (try Google for “mortgage affordability calculator”) or to get a more accurate view you can consult a mortgage advisor. or a mortgage broker. The calculation of how much you can afford to spend will depend on the fixed part of your income and the variable part (eg overtime, bonuses, etc.). The maximum aggregate amount you can borrow will then be a “multiple” of that income amount.
The amount of mortgage you can afford will also determine how much you need to save for the deposit. At a minimum, it would usually be 5% of the value of the property, but if you can save 10% or more, it will improve the mortgage deals you can get and maybe even better rates.
By the way, I would also suggest you really think about your personal affordability. For example, you can talk to a high street construction company, and they may be willing to offer you a mortgage for £ 200,000 – but repayments from a mortgage of this size can leave you with very little leeway in your life. your finances, which makes it difficult to furnish or renovate your property or to build an emergency fund for example. It may be better for you to look for cheaper properties that will lower your monthly repayments and also lower the amount you need to save for your deposit.
Additionally – remember that the deposit is only part of the cost of buying a property – you should also factor in attorney fees (commonly known as Conveyancing), expenses for renovations, and furnishing your property and, depending on the value of the property, stamp duty (although first-time buyers are unlikely to cross the £ 300,000 threshold of the property price at which this must be paid).
So once you have a good idea of how much you need to save, how do you raise the funds?
Enjoy a Lifetime ISA
This product allows you to pay up to £ 4,000 per year, to which the government adds a 25% bonus. So that could add up to £ 1,000 of free money every year! You also earn interest on your contributions. You can withdraw this money, including bonus funds, to use as a deposit for your first home. It should be noted that Lifetime ISAs are open to 18-40 year olds, and if the money is withdrawn for any reason other than a first-time home purchase, you will need to pay a 25% penalty.
Saving money really comes down to effective budgeting. Plan exactly how much you’re getting home, how much you have to pay for essential costs like rent, taxes, insurance, food, etc. Once you have your budget stick to it religiously and don’t be tempted to “treat yourself” or “take a month off to save”. When you know how much you can invest in your home savings each month, set up a standing order to transfer the money on payday. This way the money is taken out of your checking account and you are less likely to be tempted to dip into it.
Lower the costs
There are actually two ways to increase the amount of money you have available to dispose of each month: increase your income or reduce your expenses. The simpler of the two is without doubt to reduce your expenses. Take a look at your bank statements to see where you’re spending money each month (or use an app like Emma) and cut out anything you can do without. For example, you could:
– Cancel expensive subscriptions such as TV and entertainment services.
– Cancel your gym membership and exercise at home or outside, or attend fewer classes and pay as you go.
– Reduce your number of parties each month.
– Avoid eating out or spending on expensive take-out, and instead cook in batches at home and freeze portions for the week.
– Stop buying take-out coffees / hot drinks and fast food lunches, which are expensive and can quickly add up if bought every day. Do your best to make them at home in the morning instead.
Some of these money-saving measures can seem like big sacrifices, especially after the 18 months of limited freedom we all just went through due to lockdowns, but if you’re serious about getting a deposit can make a big difference to your savings.
Here are some other slightly more extreme saving ideas:
– Get rid of your car. While undoubtedly practical, cars are expensive to maintain and operate, with the cost of owning a car estimated to be over £ 3,400 per year. If you can alternately use public transport, cycling or walking, you could put a significant amount of money in your fundraiser.
– Change your current life situation. Rent is almost certainly a big part of your monthly expenses, so if there’s a way to eliminate or significantly reduce it, it could help you get your security deposit earlier. So, if possible, you can ask your parents to relocate for a reduced rent. The difference between your old rent and the new rent is all the money that can go straight to your fundraiser.
If that’s not an option for you, then maybe you could change your life situation from renting an entire property to renting a bedroom as a tenant? Websites such as spareroom.co.uk allow you to search for available rooms in your area and most have bills included in the cost.
Increase your income
An effective way to quickly increase your savings is to take a second job. Some jobs are mostly done in the evening or on weekends, such as bartender, waiter, delivery driver, or stock replenishment. These could be conducted alongside your current job, and any money earned through this second role could go directly into your home savings plan.
All the money you save should be maximized through interest. Interest rates are not very good right now and haven’t been since the 2008 global financial crisis, but there are still fixed ISAs that pay around 1% which is better than just leave your money in your checking account. You can also try your luck by keeping your savings deposits in premium bonds.