Hello future homeowners! We’re here to shine a light on one of the most commonly asked questions we hear: ‘How much do I need to save for a deposit?’. It’s one of the major pivotal steps towards realising your homeownership dreams – understanding the deposit you need to secure a mortgage. Let’s dive right in!
As you’ve probably gathered, getting a mortgage isn’t as simple as just asking for one. There are a few factors to consider, with one of the most important being the amount you need for a deposit. Imagine your deposit as the down payment, the initial chunk of money that you’re going to put towards your new home.
The golden rule to remember here is; the larger the deposit, the smaller your mortgage loan needs to be. This can increase your chances of securing a more favourable interest rate and therefore reduce your monthly repayments. Sounds pretty good, right?
But you might be asking, “How much do I need to actually save?” The typical figure you’ll often hear is 20% of the property’s price. Let’s say you’ve got your eyes set on a fabulous £250,000 home. In this scenario, a 20% deposit would be £50,000. It sounds a lot, but don’t let that figure scare you. Remember, this is just the conventional wisdom.
What’s encouraging is that in the real world, there’s thankfully more flexibility. Many lenders offer options for buyers who can’t quite reach the 20% mark. Products like first-time homebuyer mortgages and other government-insured or guaranteed mortgages can let you purchase a home with as little as 5% down. That means, for the same £250,000 home, you’d only need a deposit of £12,500, which probably feels much more achievable if you’re just starting out.
Now, you might be wondering why anyone would choose to save more for a larger deposit if they could get a mortgage with less. That’s a great question! The main reason is to obtain a better interest rate. If the lender sees you are borrowing less and your loan-to-value ratio is more favourable, they will offer preferential rates, which ultimately means your monthly repayments will be less. This could save you thousands of pounds over the lifetime of the loan!
However, it’s essential not to feel discouraged if you can’t save a large deposit. The path to homeownership varies for everyone, and there are numerous options available, which we can explain further to you if you’d like to have a chat. And, if you’re a first-time buyer, there are specific mortgages designed just for you.
Remember to take into account other related costs like; conveyancing fees, stamp duty, moving expenses, property maintenance, and potential unexpected repairs once you are in your new home. So, while focusing on saving for a deposit, it’s also crucial to have a buffer to cover these extra costs.
Now, let’s talk about some smart saving strategies:
Set Up a High Interest Savings Account – If you’re serious about saving money for a deposit, you need to set up a separate, higher interest savings account specifically for your home deposit fund. Go for a savings account which won’t let you access the money immediately, as these tend to have better interest rates. Instead of waiting to see what you have left spare at the end of each month, automatically transfer a certain amount of money every pay day into this account. This method allows no excuses and can help make saving become consistent. It also gets you used to budgeting your incomings and outgoings when the time comes to start paying off a mortgage.
Reduce Unnecessary Expenses – Check for areas where you can cut back. Maybe it’s dining out less, downgrading your car or spending less on clothes or other guilty pleasures. Not only will you save more money, but it’ll look better when you apply for your mortgage, as you’ll be asked by your lender about your everyday spending, both essential and optional. We’d always advise reducing your spending on non-essential outgoings as much as possible in the three months prior to a mortgage application. It will show your lender you are responsible with your finances and that you have plenty of disposable income remaining after paying for your essentials.
Get your Credit Score Heading in the Right Direction– It’s also important to try to get your credit score as strong as possible. Your credit card balance should ideally sit under 50% of your credit limit. For example, if your credit limit is £2,000, the balance of what you owe should sit under £1000, otherwise this will negatively affect your credit score, which can make it more difficult to pass with a lender offering a lower deposit. So, although saving is important, paying off any existing debt is even more important prior to a mortgage application!
One last piece of advice: patience is key! Saving for a home deposit is a marathon, not a sprint. It’s okay to start small and gradually increase your savings over time. Remember that your dream of homeownership is worth the wait.
Hopefully, this gives you a better sense of the amount you’ll need for a deposit and how to start saving for it. Remember, these are just general guidelines. The exact amount you’ll need will depend on your personal situation and the terms of the specific mortgage product you choose.
Do your research (check out our Knowledge Centre) and speak with mortgage professionals to find the option that best suits your needs. We’ve helped thousands of first-time buyers here at HLC Mortgages, and we’d love to help you too!
If you have any questions about the process of buying a house or anything financial, or you’re ready to move forward with an AIP (we can usually do this for you within 30 minutes) or mortgage application give us a call on 01527 222 694. Alternatively, click here and we’ll get someone to contact you.