One question we get asked a lot here at Money Monday is “how do I save for a deposit?”. Unsurprisingly, the answer is intertwined with your financial habits.
Saving for a deposit is usually something you do on your own, and requires dedication, planning and organisation. Below are ten useful tips to help you with this process.
1. Work out how much you need
The type, size and location of property all play a significant role in determining the price of the property you can afford. This, coupled with your income, will give you an idea of how big you will need your deposit to be.
You can borrow up to 4.5 times your income and up to 85% of the property value (LTV – loan to value, this changes regularly as it is dependant on what is available in the market). Of course, the larger the deposit, the less you will need to borrow.
2. Be flexible
Saving for a deposit is likely to add a significant amount to your expenses. Certainly, the more you can save each month, the sooner you will be in a position to buy. So flexibility is vital. In practice, this means being creative and making difficult decisions in order to budget for the additional savings.
Could you split the deposit – and the mortgage to come – with a friend or partner? This may get you both onto the property ladder quicker than you’d be able to on your own. Also, you could consider shared ownership, where you part own and part rent the property.
As much as buying your first home is a rather big deal, your first purchase does not need to be the ultimate purchase. If you are unable to buy what you really want straight away, consider it an investment, allowing you the opportunity to build equity and buy what you really want later.
3. Consider other costs
When buying property, it’s unfortunately not just a case of paying the asking price with your saved deposit and a mortgage from the bank. There are a few other costs to be prepared for.
Stamp duty is likely to be applicable, especially if you’re buying in London, as well as solicitors’ legal fees and surveyor charges. You will also need to be prepared for the costs associated with owning the property – utilities, service charge, council tax, moving costs etc.
4. Use a budget
Once you have a rough idea of how much you need to save, you need to plan how you are actually going to do it. There’s no shortcut here, but it doesn’t need to be daunting. Rather than complicating matters, your budget will simplify the process. Better still, a budget forecast may help you identify when you’ll be able to up your monthly savings – helping you achieve your goal faster!
It’s vital that your budgeting is based on a realistic target date and realistic monthly savings. If your goal is unattainable, you’ll become disheartened by frequent setbacks. Check out this video taking you through budget forecasting.
5. Assess debt
Saving for a deposit to purchase a mortgaged property means preparing to take on significant debt. So to make room for this, you should ensure you have no other debts, ideally before you start saving for the deposit.
Abolishing your debts will give you breathing room to put more money into your deposit fund and your budget should reflect this principle until all debt is removed.
6. Reduce expenses
Remember we said you should be flexible? The fewer expenses you have, and the smaller they are, the faster you will build your deposit and the easier it will be to reach your goal. Here, downsizing can help. If you are renting, could you move to a smaller property? Or could you move in with family?
Otherwise, the usual budgeting rules apply. Cut down on unnecessary expenses such as takeaways and on-demand television subscriptions, and reduce the cost of the necessary as much as possible. It’s always worth letting your broadband and mobile phone providers know that you’re considering going elsewhere – if they don’t improve your deal, find a better one!
7. Ignore others
Buying a home is a huge step. Not to mention top adulting. Don’t concern yourself with friends trying to tempt you with nights out and extravagant holidays. Just weigh up the value. If it’s outside of your budgeting, remember the bigger picture – if the deposit means more, don’t get sidetracked.
8. Save smart
There are schemes set up by the government to get you where you need to be faster by way of dedicated savings accounts. Help to Buy ISAs and LISAs even offer 25% on top of your savings! That’s free money for you to put towards your deposit.
As well as “locked-in” savings accounts – restricting access to your money once you’ve deposited it – are ideal for deposit-saving. The best way to reduce the temptation to dip into a savings pot is by removing the option. And they’ll invariably offer the better interest rates too.
Always save as soon as you are paid! Don’t wait until you’ve paid all of your expenses to save what is left. Working with a budget is key here – that way you know exactly how much you can afford to save each month and still cover your bills. Finally, set up standing orders for your savings, so you don’t have to think about it!
9. Increase income
As well as reducing expenses, your budget can assist with increasing income. Why not have a side hustle, beyond the nine-to-five? Do you have skills that aren’t currently bringing in money? Put them to good use.
Are you deserving of a pay rise at work? Ask the question. Is there a promotion opportunity? Is the extra responsibility worth the extra money with your deposit in mind? Be pragmatic.
On a smaller scale, do you have unwanted items around your home that could bring in extra money? eBay, Craigslist, Gumtree and Facebook Marketplace are a couple of clicks away.
Reducing your outgoings and increasing your income are the two elements which, when working in tandem along with your budget, will get you that deposit in the quickest time possible. It doesn’t have to be complicated, and you could be a property owner sooner than you think!
10. Have fun with it!
It’s likely to be an occasionally lonely road, so find opportunities to mingle with others. If this is your first purchase, celebrate your wins, maybe as you pass a milestone – celebrate the first £2,000, then £5,000, then £10,000! Happy saving!