Saving for a mortgage
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Renting in the UK can be expensive, and this, combined with the cost of living crisis, has made it difficult for many to save enough for a deposit on a mortgage. But that shouldn’t dissuade you. On this page, you’ll find out how you can save for a mortgage deposit, what type of mortgage savings accounts might be right for you and if you qualify for government-backed schemes that help you save for a mortgage.
Identify the type and cost of property you would like to buy: You can then work out roughly how much you’ll need to save for a deposit
Put money away regularly: Saving into an account every month can help you build a deposit
Consider government-backed schemes: Things like the Help to Save scheme can help you to get on the property ladder sooner
How much do I need to save for a mortgage?
How much you need to save for a mortgage depends on your mortgage deposit amount, the value of the property and what type of property you want to buy, which can be affected by location, size and whether the property is new or old. Deposit requirements in the UK lessened after the 2008 financial crisis, and some mortgage lenders will now allow you to deposit as little as 5% of a property’s value to get a mortgage. This means that if you want to purchase a £300,000 property at a 5% deposit, you would need to save at least £15,000. The remaining £285,000 would be the value of your mortgage.
It’s worth considering that the higher the percentage of your mortgage you pay as a deposit, the more likely it is that you’ll find a more flexible mortgage lender and be able to get a mortgage on a higher value property.
How do I save for a deposit?
Once you know the type and cost of the property you want to buy, you can work out roughly how much you’ll need to save for a deposit. Starting to save for a deposit might seem like an insurmountable challenge, but there are things you can do that could help straight away.
5 tips for saving for a mortgage deposit
1. Reduce your outgoing bills
2. Cut down on your everyday expenses
3. Consider using a savings or budgeting app
4. Assess your current living situation
5. Apply for the Help to Save scheme
Let’s look at each of those mortgage saving tips in a little more detail:
1. Reduce your outgoing bills
Think of all the bills you are currently paying. Are there any that you could reduce or eliminate? Perhaps you could shop around for cheaper mobile phone and broadband packages, lower your energy consumption or switch your energy bills to cheaper tariffs. You could also cancel non-essential services such as TV and music streaming apps, gym or club memberships and any other subscriptions that aren’t a necessity.
2. Cut down on your everyday expenses
Cutting down on minor lifestyle expenses can have a major impact in the long run. Check your bank statements and look for things that aren’t a necessity. If you often eat out or buy takeaway coffee, it might be worth considering eating at home or brewing your caffeine shot at home or in the office. A £2.45 cup of coffee may not sound like much, but if you buy two a week, that’s £254.80 over a year. Identifying seemingly small expenses can have a significant impact on your overall savings.
3. Consider using a savings or budgeting app
There are several apps available that can help you funnel away spare cash and build your deposit. Some apps can help you make the right choices and show you clear calculations of how much you’ll save by cutting unnecessary expenses.
4. Assess your current living situation
If you’re renting, you can potentially save a lot of money by changing your living situation. Many people consider moving back in with their parents when saving for a mortgage to keep their monthly rent and bills to a minimum. This will help you grow your mortgage deposit a lot faster.
If you live alone, you could consider moving to a cheaper area or house-sharing.
5. Apply for the Help to Save scheme
The Help to Save scheme is a savings account designed for low-income earners claiming universal credit or working tax credits. You can save between £1 and £50 each month, although there’s no requirement to save every month. After two years and after four years, you’ll earn a 50% bonus from the government, up to a maximum of £1,200. It’s also a type of easy access account, so you can make withdrawals whenever you need to.
The bonus you receive after the first two years is based on the highest amount you held in your account at any time to date, rather than how much you have at the end of the first two years. For example, if the highest amount you’ve had in the account is £1,000, but you’ve withdrawn £300 before the end of the two years, you’ll receive a 50% bonus on the £1000.
After four years, the bonus you earn will be based on your highest balance during years three and four that exceeds the highest balance you had in the first two years. For example, assuming you saved £800 in years one and two, and £1,000 in years three and four, you’d earn a £100 bonus. That’s because you saved £200 more in years three and four, and you’d earn a 50% bonus on that amount.
Learn how to save
What type of savings account should I consider when saving for a mortgage?
Savings accounts can help you get into the habit of putting money aside regularly to build your mortgage deposit. Comparing the best savings accounts for mortgages will help you find the most competitive interest rates and the right savings accounts for your needs. If you have savings already, you might consider lump sum savings accounts such as notice accounts and fixed rate bonds, both of which typically provide higher interest rates than standard savings accounts.
If you’re looking for savings accounts that offer competitive variable rates and flexibility when you need to make a withdrawal, a notice account might be right for you. This type of savings account allows you to withdraw money when you give your savings provider a certain amount of notice, typically between 30 and 90 days. If you’re saving for a mortgage but don’t know when you’ll need to pay a deposit, having the flexibility to withdraw at short notice can be beneficial.
If you’d prefer an account that earns a competitive fixed rate of interest, a fixed term savings account might be a better option. You can lock a lump sum of money away for a set time, typically between six months and five years, confident of a guaranteed return as you’ll earn the same interest rate from the day you open the account until the end of your fixed term.
Do I qualify for the Help to Save scheme?
To be eligible for the Help to Save scheme, you need to be a UK resident, posted overseas as a crown servant or be a member of the British Armed Forces. You must also meet one or more of these criteria:
- You’re receiving working tax credit
- You’re entitled to working tax credit or receiving child tax credit
- You’re claiming universal credit and earning at least £604.56 per month
Should I invest to save for a mortgage deposit?
If you’re saving for a mortgage deposit, you may feel tempted to invest your money in the stock market rather than saving it in a traditional savings account, but this can be very risky and is also more suitable for long-term financial goals.
With any investment there is always the risk of losing your money, and to have that happen while you’re saving for a house could be a major setback. For this reason, it’s probably best to consider savings accounts over investing.
What to do while you save
Having enough savings behind you is the best way to prepare for getting a mortgage, but there are other things you can do simultaneously to help you secure the mortgage you want.
Mortgage lenders will want to see that you have a regular income and proof of long term employment. It also helps if you have a good credit history and are on the electoral system. While you are saving, you can look for ways to start improving your credit score, such as by paying off debt, make sure you’re registered to vote and start putting together the necessary paperwork.
What if I can’t save enough for a mortgage?
Even when you stick to your savings plan, unexpected situations or expenses may put your target out of reach. The good news is that there are other options, like the following, to consider:
Purchasing with friends or relatives
It’s increasingly popular for friends or siblings to buy a property together. Some mortgage lenders offer joint mortgages that allow groups of up to four people on the loan. They will usually keep in contact with the two highest earners, but everyone in the group is equally responsible for making their repayments.
The bank of mum and dad
If they’re able to help, a financial gift or loan from your parents could be enough to get you on the property ladder. You’ll need to fill out official documents with your mortgage provider to confirm this arrangement. You could also explore guarantor mortgages, which enable you to take out a mortgage with either a small or no deposit, provided your parents offer their property or savings as security against your loan.
Consider a Lifetime ISA
With a Lifetime ISA, you can put in up to £4,000 each year until you’re 50, and the government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. You can withdraw money from your ISA if you’re buying your first home, aged 60 or over, or terminally ill, with less than 12 months to live. However, if you withdraw for any other reason, you'll pay a withdrawal charge of 25% if you withdraw cash or assets.
Shared ownership schemes
Shared ownership schemes allow you to buy a share of the property you want, typically between 25% and 75%, and pay rent on the rest. You can usually buy the remainder of the property if you can afford it at a later date.
95% mortgages
In 2007, there were more than 800 different 95% mortgages available for first-time buyers. This provision stopped following the financial crisis of 2008, making 5% deposit mortgages relatively scarce until 2012, when lenders started reintroducing them through various different ‘help to buy’ schemes.
While these forms of mortgages have been available throughout recent decades, the level of home ownership has dropped, mainly due to difficulties in getting onto the housing ladder in the first place, and the number of households in the private rented sector has increased from 2.8 million in 2007 to 4.5 million in 2017.
Following the impact of the coronavirus pandemic on the UK economy, Rishi Sunak announced the return of 95% mortgages in the 2021 budget on the 3rd March. Lenders began offering this type of mortgage from mid-April, in the hopes that this would spur the economy and turn ‘generation rent’ into ‘generation buy’. The scheme is planned to run until December 2022.
What is a 95% mortgage?
A 95% mortgage, also known as a 5% deposit mortgage, is a type of mortgage that enables you to borrow up to 95% of the purchase price of the property you want to buy, meaning you only have to pay a 5% deposit upfront. The government announced the 95% mortgage guarantee scheme in 2021, and it runs until 30th June 2025. It's available to all home buyers on properties worth up to £600,000, and lenders including Barclays, HSBC, NatWest, Santander and Virgin Money participate in the scheme.
While 95% mortgages will limit your choice of lender, they will also allow you to get on the property ladder sooner, as you need less of a lump sum upfront.
Why have 5% deposit mortgages been introduced?
The 5% deposit scheme was announced as part of the 2021 budget, in order to both encourage lenders to re-enter the 95% market as well as help more first-time buyers secure a home.
In his budget speech, Chancellor Rishi Sunak said that “Every new homeowner and mover supports jobs right across the housing sector, but saving for a big enough deposit can be hard, especially for first-time buyers. By giving lenders the option of a government guarantee on 95% mortgages, many more products will become available, boosting the sector, creating new jobs and helping people achieve their dream of owning their own home.”
How do 95% mortgages work?
The scheme is similar to the former Help to Buy mortgage guarantee scheme, which closed in 2017. There is no real practical difference for homebuyers between the process of the old scheme and this one.
Lenders will be encouraged to offer 95% mortgages with the support of ‘government backing’. This means lenders have a government guarantee in the event you are unable to meet your monthly mortgage repayments, or if house prices fall and the property falls into negative equity, meaning it is worth less than the outstanding loan on it. The scheme makes lenders more inclined to offer these mortgages, because the risk is carried by the government.
Am I eligible for a 95% mortgage?
The same credit checks will be carried out when you apply for a mortgage, and having a 5% deposit will not necessarily be enough to secure the loan, as is the case with any mortgage.
Income and job stability is a huge part of applying for a mortgage. Homebuyers must prove that they can comfortably afford the monthly repayments after other essential spending has been covered.
To get an idea of how much you need to save for a mortgage, how much it’s going to cost you per month, how much you’ll be able to lend and whether or not you can afford it, many banks offer a free online mortgage calculator.
The advantages and disadvantages of 95% mortgages
The main, and most obvious, advantage of a 95% mortgage is that you only need a relatively small deposit while still being able to get on the property ladder and out of the renting cycle.
The flip side of this is potentially lower maximum loan amounts due to your small deposit, and higher interest rates. Higher interest rates usually occur on mortgages where the LTV, or loan-to-buy, ratio is larger.
These types of mortgages also carry a greater risk of negative equity should house prices fall, and you still owe more than the property is worth, and you may find it difficult to remortgage later down the line.
However, as house prices continue to rise, they may rise faster than the rate at which you’re able to save towards a larger deposit, making a 5% deposit a better option when you look at your larger financial picture.
Applying for savings accounts
If you want a savings account that will help you save for a mortgage, you can quickly and easily open savings accounts with attractive rates from a range of UK banks by registering for a Raisin UK Account and logging in to apply today. It’s completely free.