April 04, 2024
Fees Free Mortgage Team

How to Save for a House Deposit

April 04, 2024 - Fees Free Mortgage Team

How to Save for a House Deposit

Buying your first home is one of life’s big milestones. It’s a path paved with decisions, dreams, and a little bit of determination. The first and most significant step on this journey? Saving for your house deposit.

At Fees Free Mortgages, we understand that saving for a deposit can seem daunting, especially when you’re starting out. But we’re here to walk you through it, offering expert advice, practical tips, and that much-needed moral support.

Why Is Your Deposit Important?

Your deposit is a promise to lenders that you’re all in – serious, committed, and ready to take on the adventure of homeownership. This commitment does wonders, sparking confidence in lenders and often leading to them rolling out the red carpet for you with more favourable mortgage terms.

The size of your deposit can directly impact the interest rates available to you. A heftier deposit? It’s like a key that can unlock lower interest rates, thanks to a lower loan-to-value ratio. This shows lenders that you’re a bet they’re willing to take.

It might sound a bit upside down, a substantial deposit can actually boost how much you can borrow. It shows you’ve got financial discipline and stability, which lenders favour when deciding how much they’re willing to lend.

Every pound from your deposit is a pound you own outright in your new home, right from the start. This isn’t just money spent; it’s money invested in your future, padding your financial safety net and bumping up your net worth.

Setting Your Savings Target

How Much Do You Need to Save?

Typically, the magic number for a house deposit hovers around 10% to 20% of the property’s purchase price. Why aim for a 20% deposit? A deposit of this size often rewards you with more favourable mortgage rates, reducing the overall cost of borrowing. It shows lenders that you’re a lower-risk borrower, which can smooth your path to approval.

While 20% is ideal, if you’re a first-time buyer looking to set sail then a 10% deposit should send you on your way. In certain circumstances, and with specific mortgage products, it’s possible to start your homeownership journey with less. However, smaller deposits typically mean higher interest rates and potentially higher monthly repayments. 

Calculating Your Ideal House Deposit

To calculate your ideal deposit, you have to understand the Loan-to-Value ratio. The LTV ratio is the percentage of the property’s value that you’re looking to borrow. The remainder? That’s your deposit. For example, if you’re aiming for a mortgage with an 80% LTV ratio, your deposit needs to cover the remaining 20% of the home’s purchase price.

A larger deposit not only decreases your LTV ratio but can also help you get those lower interest rates, making your mortgage more affordable in the long run. Additionally, it reduces your monthly repayments and provides you with more equity in your home from the start, offering a buffer should your property’s value change. 

Assessing Your Financial Health

Gather Your Financial Data

Firstly is your income, this includes not just the steady pay check from your main job but any of those additional streams from a side hustle or a wisely made investment. Next, you’ll need to uncover those tucked away savings, whether they’re reserved for that significant milestone, or your emergency fund. No journey is without its obstacles. So to complete the picture, you’ll need to gather your debts, from the credit card balances to the student loans, and other financial commitments.

Analyse Your Debt-to-Income Ratio

Your debt-to-income reveals how much of your monthly income goes towards paying off debts. You can calculate this by dividing your monthly debt payments by your gross monthly income. A lower DTI ratio means you’re in better financial health, indicating you’re not drowning in debt.

Review Your Savings Rate

How much of your income turns into savings each month? This rate is your progress marker, showing how swiftly you’re moving towards your deposit goal. If you find your savings journey slowing, it might be time to adjust. 

Check Your Credit Score

Your credit score is your guiding star, impacting the mortgage paths available to you. A higher score not only brightens your prospects but can also give you more favourable mortgage rates. By checking your credit report, you can ensure you’re on the right course.

Identify Areas to Cut Back

Review Recurring Subscriptions

It’s easy to accumulate subscriptions for services we barely use. Whether it’s streaming platforms, magazines, or gym memberships, take a moment to assess what you truly use and enjoy. Cancelling even a couple of subscriptions can free up a surprising amount of money over time.

Embrace Home Cooking

While dining out and takeaways are wonderful treats, they can also put a dent in your budget. By embracing home cooking, you can enjoy healthier meals at a fraction of the cost. Consider meal planning and batch cooking to maximise savings and minimise effort.

Shop Smarter

Become a savvy shopper by looking out for discounts, using cashback apps, and sticking to a shopping list. Sometimes, switching to store brands for everyday items can result in substantial savings without compromising on quality.

Rethink Transportation

Transportation can weigh down your monthly expenses, especially if you rely on a car. Think about whether using public transport or even biking to work could save you money on fuel, parking, and maintenance costs. 

Audit Your Energy Usage

Energy costs can creep up, especially in colder months. By making simple changes like switching to energy-efficient bulbs, fixing drafts, and being mindful of heating usage, you can reduce your bills. Sometimes, the initial investment in energy-saving measures pays off significantly in the long run.

Leisure and Entertainment

Leisure is essential, but it doesn’t always have to come with a high price tag. Look for free community events, enjoy nature’s offerings by hiking or visiting parks, or host game nights at home.

Smart Saving Strategies

High-Interest Savings Accounts

High-interest savings accounts are exactly what they sound like, they’re savings accounts that offer a higher rate of interest than standard accounts. This means your savings don’t just sit there; they actively grow, collecting interest to increase your balance over time.

Even a small difference in interest rates can significantly impact the total amount you save over time. These accounts are a safe place for your deposit savings, typically protected up to a certain amount by financial services compensation schemes. But they’re not locked away forever, many high-interest savings accounts still offer easy access to your funds, ensuring you can reach your money if you need to without heavy penalties. 

Compounding Interest

Compounding interest is what happens when your interest earns interest. Unlike simple interest, which is calculated only on the principal amount you deposit, compounding interest grows over time because it accumulates on both your initial deposit and the interest it’s already earned.

Over time, even small deposits can snowball into significant sums, thanks to the compounding effect. By choosing a savings account that offers compounding interest, you’re making your money work harder for you. So, the longer your money is invested, the more dramatic the compounding effect becomes.

Automatic Savings Plans

Automatic savings plans are essentially a “set it and forget it” approach to building your house deposit. By automatically transferring a predetermined amount of money from your checking account to your savings account at regular intervals, you’re ensuring that saving for your deposit becomes a seamless part of your monthly routine.

By maintaining a consistent saving habit, you can build a substantial deposit over time. Without having to catch a glimpse of your funds and transferring them automatically, you’re ensuring that your house deposit fund grows steadily without the temptation to spend. Knowing that your savings are growing automatically gives you one less thing to worry about in your busy life.

Government Schemes and Help

Lifetime ISA for First-Time Buyers

If you’re a first-time buyer aged 18 to 39, then you can open a Lifetime ISA and continue to contribute to it until you’re 50. It offers a generous government bonus of 25% on top of what you save, up to a maximum bonus of £1,000 per year. You can use it towards purchasing your first home, up to £450,000. When you’re ready to buy your first home, you can withdraw the funds without losing the bonus, provided your account has been open for at least 12 months.

Help to Buy Equity Loan

If you’ve got big homeownership dreams, but you’re held back by a small deposit, then the Help to Buy Equity Loan covers a portion of your home’s purchase price. The government lends you up to 20% of the cost of your newly built home (40% in London), so you’ll only need a 5% cash deposit and a 75% mortgage to cover the rest. For the first five years, the loan is interest-free, giving you breathing room as you adjust to homeownership. You’re not required to pay off the loan until you sell your home, or at the end of your mortgage period, whichever comes first.

Shared Ownership Schemes

Shared Ownership allows you to purchase between 25% and 75% of a home’s value and pay rent on the remaining share. Over time, you can buy more shares in your home, called “staircasing”, until you own 100%. This means you can increase your ownership as your financial situation improves. It’s a part-buy, part-rent way of owning your own home, giving you a more affordable entry point into the housing market.

How to Save for a House Deposit with Fees Free Mortgage

At Fees Free Mortgages, we’re not just your advisors; we’re your partners. We believe in empowering you with knowledge, supporting you with tailored advice, and encouraging you every step of the way. From understanding the basics of budgeting to maximising government schemes and harnessing the power of high-interest savings accounts and compounding interest, we’re here to ensure your savings plan is as efficient and effective as possible.

Whether you’re just starting to save or you’re looking for ways to boost your current savings, Fees Free Mortgages is here to guide you. So, if you’re ready to start saving for your house deposit, or if you’re seeking bespoke advice to understand your savings strategy more effectively, reach out to us. Let’s turn dreams into doors, opening the way to your new home.

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