Everything you need to know about saving for a mortgage
Table of Contents
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 established. 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:
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.
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
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 Help to Buy savings account or loan
A Help to Buy savings account or loan from the government can help first-time buyers get on the property ladder. There are several different options available, including an ISA, an equity loan and shared ownership. Remember that the size of the loan will differ and it depends on where you live.
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.
Applying for savings accounts
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