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HOW TO: YOUR GUIDE TO SAVING FOR A DEPOSIT

HOW TO: YOUR GUIDE TO SAVING FOR A DEPOSIT

If owning a home is high on your wish list, building a good-sized deposit is a great place to start. A survey by English Housing showed 56% of private renters are hoping to become homeowners in the near future.

The research found 34% of people believe the main barrier to applying for a mortgage is not having a large enough deposit. A further 16% believed the cost of taking out a home loan was too high.

Lee Cardwell, from Mortgage Bureau in Rotherham, is an independent mortgage advisor to Strata customers. He says there are benefits to saving as much as possible. “The more you save up for a deposit from the outset, the better,” says Lee. “This will bring down the cost of your repayments in the long term and open up a wider range of mortgage products.

“It’s important to bear in mind lenders will look for at least a 10% deposit if you are not using the government’s Help to Buy scheme.”

To be eligible for a Help to Buy equity loan, you need to raise 5% of the property’s value; the government will lend you up to 20% of the cost of the home, meaning you only need a 75% mortgage.

We explore steps you could take to help build a deposit, especially if you haven’t already started setting money aside.

Set a simple savings target

Having a savings target in place can help focus your efforts. You might be unsure how much you will need to save, so research your chosen area and property type to get a better idea of current market values.
Ask yourself the following questions:

  • How much can I afford to spend on a new home?

  • How much would I need to save for a deposit?

  • What is a realistic timescale for saving that amount?

  • If I stick to the savings plan, when will I be able to afford to buy my home?

For example, if you would like to buy a £120,000 home, you would need to save a 10% deposit of £12,000.

Calculate your basic budget

A survey carried out by YouGov on behalf of the Council of Mortgage Lenders found 79% of British adults would like to become homeowners in the next 10 years. A strict but realistic budget could speed up the process and mean you’re buying your new home sooner than expected.

To work out a monthly budget, you need to look at:

  • Your monthly income (how much you earn, receive in benefits. May this vary over the year? If so, provide a monthly average).

  • Your monthly outgoings (including rent, household bills such as gas, electricity, food, phone and internet charges, car tax and insurance, plus running costs).

  • How much is left over each month? This is your spending budget.

  • How much of this is realistic to set aside per month? This is the amount you should aim to save.

For example, if you’re an individual hoping to buy a £120,000 home in the next 10 years, you would need to set aside £100 per month to raise the 10% deposit. If you’re buying as a couple, or with a friend, this would be £50 each per month.

If you wanted to buy the home in half the time, you would need to save £200 per month over 5 years.

Sticking to a budget should be an ongoing process. Your personal financial situation is likely to change from year to year, so regularly review how much you are spending and saving to see whether there is any scope for increasing your deposit further.

Open a savings account

A separate account for the deposit on your new home can help keep your savings on track, and earn a small amount of interest. It will minimise the chances of accessing your savings when funds are running low, while a weekly or monthly standing order will ensure you are making regular contributions.

The Help to Buy ISA was made available to first-time buyers on December 1, 2015 and 250,000 people have already opened an account. The government has pledged to top up your savings by 25%, up to a maximum tax free bonus of £3,000. This amount is available per person, so if you’re buying with someone else, it could mean an additional £6,000 towards your deposit.

Make cutbacks where you can

Reducing your non-essential spend is crucial to building a strong deposit, which means taking note of any areas where you can make cutbacks.

Research from Barclaycard shows many people in the UK are planning to increase their spending this year, potentially making the task more difficult. Over a third (36%) revealed they would be buying electronic devices, while 31% are hoping to eat out more in 2016.

Even the smallest behavioural changes could make a big difference. Revert back to your budget if you are in doubt over how much you should – or shouldn’t – be spending.

For example, a £3 takeaway coffee on your way to work each day will add up to around £759 a year. Put this money into your savings account instead, where it will build your deposit and earn interest.

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