If you’re a first-time buyer, putting down a deposit is part and parcel of purchasing your first home. We all know the bigger the deposit the better but how can buying novices save effectively in 2022?
A little background about deposits
A cash deposit is provided by buyers to show serious commitment to a property purchase. The deposit is paid to the seller’s solicitor at exchange and if the buyer withdraws from the purchase, they will forfeit their deposit. When you consider Halifax’s UK average house price in November was £272,992, 10% of that – £27,299 – is a sum most of us can’t afford to lose.
Deposits and mortgages
The cash deposit provided at exchange is the same deposit that is considered when applying for a mortgage – there’s no need to save twice! The bigger the deposit the better as this will improve the LTV (loan-to-value) – the ratio of mortgage to property value. For example, if you’re buying a £200,000 flat with a £20,000 (10%) deposit, you’ll need a 90% LTV mortgage.
Lower LTVs – where the lender loans less and the buyer provides a larger deposit – result in cheaper monthly repayments, the ability to reduce the mortgage term and access to the lowest interest rates, and this is why saving for the biggest deposit possible is advisable.
Existing homeowners don’t need a deposit
If you’re already a homeowner, you won’t need to save up for a deposit when making an onward purchase as the conveyancers involved will use what’s referred to as the exchange deposit. This is where the deposit paid by the buyer at the bottom of the chain moves up and provides the security for the others involved.
How much is enough when buying your first home?
Mortgage lenders offer a number of home loans where buyers need to supply a 5% deposit, although lower rates of interest are generally attached to products where the purchaser can supply a 10%, 15% or even 20% deposit. If you’re at the start of your savings journey, these 6 tips will help get you started:-
- Open a specific account
Use a comparison site to find the account that pays the best interest rate and open an account for the sole purpose of saving for a deposit. Look for accounts that limit how many times you can withdraw money to stop you accessing the account in an emergency.
- Save in a deposit-specific ISA
An alternative to a savings account is the lifetime ISA (LISA) – a tax-free savings or investment account designed specifically for those saving for their first home or for retirement. You must be between 18 and 39 to open a LISA, and for every £4 saved, the Government will add £1, up to a maximum of £1,000 every tax year. Savings can be withdrawn after the first 12 months and used as a deposit on a property worth up to £450,000.
- Make saving automatic
Manually moving money between accounts is a habit you can easily fall out of, so set up a standing order that automatically transfers money on a monthly basis into your dedicated deposit account. You could also ask for all birthday and Christmas presents to be in cash, to be paid directly into your deposit account.
- Re-evaluate your renting situation
It can be hard to save for a deposit while paying rent. You can reduce your outgoings by moving to a smaller property or by taking in a lodger (check with the landlord first). You could even remove the need to pay rent altogether by moving in with family or friends.
- Change your eating habits
A milkshake here, a pizza there – it all adds up, with a twice weekly trip to Starbucks for a caramel frappuccino and a muffin setting you back at least £5 every visit. Home cooked food will always save you money, as will swapping your food shopping habits. Replace Waitrose with a continental budget supermarket and your deposit fund will look a lot healthier.
- Shop around & switch
Save more money by reducing your monthly bills. Use comparison sites, switching incentives and introductory offers to cut what you spend on gas, electricity, broadband and mobile phones. Easy wins include changing your SIM card plan and asking rival broadband suppliers to beat your current deal.
If you need help with working out how much deposit you may need and what loan-to-value you should aim for, we’d be happy to help crunch the numbers with you. Contact us for advice and guidance.