Home ownership has fallen to its lowest level in 25 years, partly due to rising deposits required to get a mortgage. House prices are more than five times the average wage - up from three in 1997. Unless you have family willing to stump up large cash sums, raising the deposit can be the biggest hurdle to homeownership. So how can you save for a deposit?
“A journey of a thousand miles must begin with a single step.” Chinese philosopher Laozi (c 604 bc – C 531bc) in the Tao Te Ching, chapter 64.
It may take years but start saving as soon as you can and as much as you can afford. The bigger deposit you can save, the lower lending risk you will be and you will have access to a wider range of mortgage deals. Buying a house isn’t just about saving for a deposit however. You need to budget for other expenses as well, such as solicitor and surveyor fees, which you can read more about in Moving Costs (link to information sheet already written)
HOW MUCH DEPOSIT DO YOU NEED TO SAVE
Before you start saving, work out how much you need to set aside for a deposit. Research house prices for the type of property you want and area you want to buy in. Look in your local newspaper and websites such as Rightmove and Zoopla. The average house price in the UK is £200,280 according to Halifax figures published in July 2015.To buy a property for that price, you will need to save at least £10,000 which would give you a minimum five per cent deposit and even then your choice of lenders and deals will be limited. Putting down a 10 per cent deposit (£20,000) or more would get you better deals and cheaper rates.
Be realistic about what you can afford. You might have to compromise on the type of property or neighbourhood you want to buy in.
Check if you can reduce the deposit you need to pay through the Government’s Help to Buy scheme which you can read more about in Help to Buy Schemes (link to information sheet already written). However this is due to end in 2016 and banks and building societies are making 95 per cent mortgages more widely available again.
Independent financial advisors give tailored advice based on individual circumstances to help work out what is best for you. To find one in your local area see our page on Mortgage Brokers
LOOK AT YOUR BUDGET
When you know how much deposit you need, make a plan to reach this savings goal. It is likely to take several years and a sizeable chunk of your monthly income.
Take the time to work out your budget – the money you have got going out and coming in – and identify possible savings. What are the essentials and where can you cut back? It might mean fewer nights out or foreign holidays. Consider getting cash out at the beginning of the week and trying to make it last, rather than using your cards.
Being more careful with your money will also help when it comes to getting a mortgage. Lenders now scrutinise the bank accounts of potential home buyers to see if they can afford mortgage repayments or routinely splash their cash on non-essentials.
Many people in the privately rented sector are caught in the so-called “rent trap” where they can’t save to buy their own place because most of their money goes on rent.
If you want to get out of this situation, you might have to compromise. If won’t be a viable option everyone, but if your parents have space and they are willing, consider moving back in and save the money you would have spent on rent each month for a deposit. Alternatively, rent a room from a friend or in a shared house which will be cheaper than renting your own place and give you a chance to save up.
MAKE REGULAR PAYMENTS INTO A SAVINGS ACCOUNT
Open a savings account if you don’t have one and set up a regular payment by direct debit or standing order. It means you get will used to not having the money in your account to spend – and won’t have to remember to pay it in each month. Regular savings are better than relying on setting aside infrequent, one-off sums.
CONSIDER GETTING A HELP TO BUY CASH ISA
The Government has launched several schemes aimed at helping people to buy their first homes.
Under the Help to Buy ISA scheme, to be launched in December 2015, the government will add £50 for every £200 saved in the account – a 25 per cent return. The maximum the government will contribute is £3,000 which means you will have saved £12,000.
But you can put £1,000 in when you open the account – and net another £250 bonus when you come to buy. And couples buying a property together can each take out a Help to Buy Isa and get a total £6,000 bonus.
The Help to Buy Isa will be available through banks and building societies and offer different rates like normal cash ISAs. So you will earn interest like the regular ISAs as well as get the bonus at the end. Savers won’t receive the cash bonus until they put down a deposit on their first home.
The scheme is available for properties priced £250,000 nationwide and upto £450,000 in London. You don’t have to take out your first mortgage with the same lender that provides your Help to Buy ISA.
As ISAs are tax free, there is a limit on the amount you can save. This is up to £15,240 the 2015/16 tax year.
If you will want to open a Help to Buy ISA this year be careful not to any money to a cash ISA or you will have to wait until the following year. You can't contribute to a cash ISA in the same tax year as a Help to Buy ISA.
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