First-Time Buyer Guide – Part 1: Saving for a deposit

If you are considering buying your first home, you have a very exciting ride ahead of you. To help you in your venture we have launched a five-part first-time buyer guide to steer you through each stage of the process and hopefully set you up with some useful information and support to help you make the right decisions.

In this week’s article – the first part of our guide – we are going to start right at the very beginning – with saving for a deposit.

If you are reading this, you’ll very likely have decided you want to buy your own home. You’ve had a quick (possibly very lengthy) nose around RightMove, Zoopla and several other property portals and you are now wondering how on earth you are going to afford what is highly likely to be the biggest purchase of your life so far.

Making the decision about whether homeownership is the right step for you will largely depend on your financial position. If you have the means to put down a deposit then you will already be ahead of the game.

However, most of you are probably just starting save or have yet to work out a plan for putting money aside for a deposit.

In this feature we’ll be covering the following:

• How to calculate how much you’ll need to save –setting a savings goal
• Finding the best account in which to save your deposit
• The lowdown on Lifetime ISAs – a government scheme which will help you save (and which comes with a 25% bonus)
• Budgeting advice
• Some regular savings tips
• What to do next

How much should I save? Setting a goal

Your first step on this process is to set a savings goal. To do this you’ll need to work out how much your future home will cost.

Doing research on the best area and type of property to buy will have no doubt helped you establish exactly what kind of money you’ll be looking at spending and borrowing. Once you have got an idea of the value of your potential home you can look at how much deposit you’ll need.

Many first-time buyers find it most realistic to put aside between 5% and 10% towards their home. This means they will need a mortgage to make the remaining 95% or 90% of the purchase price.

If the sort of properties you have on your radar are worth, for example, £200,000 you may decide you would like to save £20,000, or 10% of the value. This would mean you would need a mortgage with a loan-to-value (LTV) of 90% (or £180,000 in the case of our example).

There will be other expenses to consider – solicitor’s fees, mortgage fees, removal costs etc – so it’s worth bearing this in mind. We’ll cover this in more detail in Part 5 of this guide.

The more you can save, the better. But don’t panic if you are struggling to find more than 5%. The number of lenders out there willing to help those with 5% deposits is rising and there are also government schemes which may help you – we’ll cover those in Part 2 of this series.

If you are still feeling lost, speak to a professional. Jeni Browne of Mortgages for Businesses is also What Mortgage’s Ask the Expert columnist – she said if you need any help with calculations or working out how much to save, speak to a broker or adviser.

“Get advice from a professional mortgage adviser as to how much you’ll be able to borrow on a mortgage against your current income. Then you can work out how much deposit you need for the type of property you’re considering,” she said.

Choosing the right savings account

There is one golden rule to follow when it comes to stashing your deposit savings – don’t leave it in your current account! It will earn absolutely no interest and you may even be tempted to dip into it.

Instead find a separate savings account – preferably one which pays decent interest and which also allows you easy access.

Greg Cunnington, director of lender relationships and new homes at Alexander Hall, who also writes the What Mortgage ‘Broker’s View’ column urged deposit savers to ensure funds were saved into accounts which could be readily accessed and evidenced when you go to physically purchase the property.

“Most lenders will ask for proof of deposit as part of the application process, and will want to ensure the funds can be evidenced quite readily,” he said.

“They also regularly ask to see the build-up of funds, so that they can check it is from savings, and so having a clear and easy to spot track record of the savings being paid can make the paperwork side of things easier and the application process quicker.”

This advice is echoed by Jeni, who said: “The first thing is to set up a dedicated savings account – if you’re a first-time buyer, consider a Lifetime ISA as the government can top this up by 25% (up to a specific limit).”

Savings expert Derek Sprawling of Paragon Bank also advises choosing an account which allows regular deposits but also offers the best return possible.

“A notice account is a great option for this, as most notice products offer unlimited deposits but a higher rate of interest than instant access account,” he said.

“Savers will need to ensure they request access to the funds within the appropriate window when progressing the house purchase,” he added.

Look out for those interest rates too. Derek said: “Maximising the interest, you receive on the funds will help you reach your deposit goals quicker. Traditionally, high street banks tend to offer much lower rates than challenger banks, so it’s important to choose an account that offers a competitive rate and to check best-buy tables.”

According to Moneyfacts.co.uk the rates for easy access accounts at the time of writing came from Aldermore and Buckinghamshire BS at 0.60% gross. You can click here to find other deals.

Lifetime ISAs

Jeni mentioned the Lifetime ISA (LISA) as a potential savings method. This is definitely worth considering as a way to save some, or all, of your deposit because you’ll receive a top-up from the government.

The LISA scheme was set up by the government to provide a tax-free savings plan for first-time buyers. It can also be used by people to save for their retirement.

You are allowed to pay in up to £4,000 per year until you are 50. This will count as part of your overall ISA allowance – which is £20,000 per year. So you can save £16,000 in other ISAs annually too.

There are a few other rules – you must open your LISA by the time you turn 40 and you cannot pay into it beyond the age of 50. You must also be over the age of 18.

However – here’s the great bit – the government will pay you 25% of your savings as a bonus each year, up to a maximum of £1,000.

Don’t forget you’ll also earn tax-free (because it’s an ISA) interest on your savings. Rates range from 0.10% per year, which is available on Skipton’s LISA to 0.85% on the Moneybox ISA.

Derek added a word of caution however. He said: “With Lifetime ISAs, it’s important to note that any withdrawal will be subject to a 25% penalty charge, which means that your capital is at risk.

“It’s important for savers choosing to put money in a Lifetime ISA to ensure they will not need to access the funds prior to the property purchase.”

You can see the full range of LISAs here courtesy of Moneyfacts.co.uk.

Start budgeting

Once you’ve picked the right account, you’ll need to work out how much you can pay into the account each month.

Jeni said: “Go through your monthly expenses in detail: do you need this subscription? Is there a cheaper option? Review all your current bills.

“Once you’ve done this, you can assess how much you can realistically save every month.”

What if you’ve got debts?

Jeni advises: “If you’ve got existing debts, like credit cards, look how you can reduce repayment costs. Often, loans have better interest rates than credit cards, which will help speed up the repayment process.”

Rachel Springall, a finance expert from Moneyfacts, echoed this advice and suggested consolidating debt. “This is a good idea for borrowers to keep track of their credit card balances and repay it easily with one repayment. Some cards are even fee-free, such as the 26-month 0% offer from Santander,” she said.

Another good idea is to use a money saving app to keep you on track with your savings.

Rachel said: “Using free apps like MoneyDashboard can be a great help to see all your income and outgoings to see where you could cut back.

“Little changes such as making a coffee at home, or even lunch, can make a huge difference after just a few weeks.”

Indeed, with the average takeaway coffee costing £2.50 – you could save at least £12.50 a week, that’s £50 a month and £600 a year. If you put those saving into a LISA you could earn an extra £150 on that from the government’s top-up.

So that’s £750 a year just by making your own coffee.

Get into the savings habit

The next step is to start actually saving the money, regularly.

Jeni has a great tip to get you started: “My best advice for sticking to this is to set up an automatic transfer into your savings account the day you get paid; that way, it’s more difficult to spend it accidentally!”

If your income is more erratic, or this method won’t work, consider using an app. Rachel suggests Chip.

“Chip works out how much money users could save and sends a text message as a notification before transferring the cash to a separate pot,” she said.

“Users can even see how long it would take them to save towards a certain goal, making it effortless to start building a savings fund. Chip is available on the Apple store and the Google Play store.”

See if there are any other ways you can put extra money aside. How about making extra money through a side hustle or offering to do overtime at work and saving this additional cash?

There are many different ways to boost your savings – take out a look at our sister website, The Money Pages, for more advice.

What to do next…

Only you know how long it will take you to save for your deposit. In the meantime, keep an eye on the property market and what’s for sale in the area.

In the next four parts in our guide for first-time buyers we will take a look at some other things you can do to improve your chances of getting a mortgage and prepare for your move.

This includes boosting your credit score, finding out more about the different types of mortgages available and preparing you for the homebuying process.

In the next feature, we are going to look at first-time buyer schemes which are available to support your step on to the first rung of the ladder.

From Help to Buy to the new Mortgage Guarantee Scheme for 95% LTV loans – we’ll take a comprehensive look at all your options.