For first time buyers, saving up a mortgage deposit can be one of the biggest hurdles to getting a foot onto the property ladder.
On top of a mortgage deposit, you will also need to pay for legal fees and in most cases, stamp duty. With rising house prices, lenders are often asking for larger deposit amounts to secure a mortgage offer on your first home. This can seem an impossible task for low and middle income families or individuals and for those already paying high monthly rent, especially within the London property market.
When you buy a Shared Ownership home, you only buy a share in the property you purchase and you often require a smaller deposit amount than when purchasing on the open market. You will still be required to raise a mortgage deposit for a Shared Ownership property, so below are tips on how to save for a deposit to help you get started.
1. Set a target
This seems like a simple starting point, but it really helps to get a clear picture of how much your new home is likely to cost so you can work out how much you will need to save. You should take a look on property portals such as Zoopla or Share to Buy to build a picture of house prices and trends in the area you want to live in. You may need to consider looking in new areas as the location is one of the greatest factors determining house prices.
You will then want to speak to a mortgage adviser who can assess your current financial position and tell you how much you will potentially be able to borrow for a mortgage. They can also advise on the size of the deposit you will need. While you are there, it is also worth asking about upfront fees, legal fees and Stamp Duty payable, as this will be payable on top of your deposit if you purchase a home.
2. Cut down your spending
Trying to save will not make a substantial difference if you live above your means. Saving for a home deposit will require you to tighten your belt quite considerably. Here are some ideas:
Cut down on your rent
Especially in London, rents can be quite high so anything that you can do to make that number smaller will make a big difference. Some of the things you might consider to achieve that include:
Moving back in with your parents
Not a perfect solution for many, but this is sure to cut down your rent and utility bills very considerably.
Opting for a flat share
Living on your own while trying to save for a deposit might sound like a luxury. Moving in with other people will allow you to make significant savings. Websites like Ideal Flatmate, Spare Room, or Room Buddies will make finding a perfect flat share easier.
Move into the suburbs
Properties outside of London tend to be cheaper than those within zones 1-4. As long as you are willing to brave a longer commute you may find a nice little flat at a discount in one of London's satellite bedroom communities.
Cut down on your transport bills
Transport costs in the capital are the second largest monthly expense that you will face. Finding a way to lower these bills will make a big difference to your overall budget and the ability to save.
If you drive, the costs of petrol, insurance and the maintenance of your car, and above all parking and Congestion Charge will easily eat into your monthly budget so switching over to using public transport will definitely make a big difference. If you are already using public transport, you can further cut you costs down by investing in a bicycle and starting to bike to work.
Cut down on entertaining
If you lead a life of a social butterfly, this can seriously eat into your budget. Thankfully there are ways of saving on these expenses without turning to "Billy no-mates" overnight.
If you go out regularly, entertaining at home could make a huge difference to your budget - especially if you cook your own meals. But even getting a takeaway will work out cheaper than going to a restaurant, especially in Central London.
Cook from scratch
Takeaways are a great way to treat yourself or as a quick and easy solution to an empty fridge, but limiting your takeaways or abandoning them altogether and cooking from scratch will deliver decent savings to your budget. Invest in some decent easy-to follow cookery books and start cooking - you might find you really like it and it will put in some extra pennies (and pounds) in your pocket.
Pack your own lunch
On the subject of cooking and not going out, if you have a habit of going to Pret or Starbucks to get your lunch every day, you'll be surprised how expensive this can prove over the course of a month. Try packing your own lunch and see the savings pile up.
3. Start saving
All the saving in the world won't make a big difference until you actually start saving for your deposit. Here are some tips on how to start.
Find savings accounts that work for you
When saving for your first home, it’s a good idea to get a savings account that allows you to contribute to it regularly. Getting a good interest rate is key, and the Money Advice Service offer a great savings account comparison table that calculates savings accounts that might be suited to you based on what you can afford to pay in.
Make sure you regularly review your savings account. Some accounts have an interest rate that is partly made up of a bonus and this bonus will normally fall away after 12 months, which will reduce the amount of interest you receive.
Look at Cash ISAs
A cash Individual Savings Account (ISA) is a tax-efficient way to save. Usually, when you have a savings account, you pay tax on whatever interest you earn. But the interest on a cash ISA isn't taxed, so all the interest you earn, you keep. Because of this fact, however, the accounts come with a cap on how much you can pay in.
You can choose from a variable rate ISA, where the rate can go up and down, or a fixed rate ISA, where you know that the interest you are paid shouldn’t change over time. However, with fixed rate ISAs you often have to pay in a lump sum at the outset which you can’t then add to, and you can’t usually make withdrawals.
Automate your saving
You should treat saving for a deposit like a bill you have to pay each month. Assess your budget and look to potentially create a standing order to a savings account each month. If you are not used to having this money as disposable income, you are less likely to dip into your savings to fund your lifestyle whilst saving for that important deposit.
Most savings accounts will let you pay in every month via standing order or direct debit, so you won't even need to remember to make the payment (although you will have to ensure you've got enough in your bank account on the date the payment goes out). Speak to your bank about setting up a direct savings payment.
4. Get a helping hand with your deposit
Reaching out to the 'Bank of Mum and Dad' is still the most common way of scraping your deposit together but if that option is not available to you, there are other solutions that you might look to. More and more high-street banks offer 95% LTV (loan-to-value) mortgages where you only need to put down 5% of your target deposit. There are also some government schemes that you might find useful.
Help to Buy Equity Loan Scheme
If you want to buy a new-build property at a price below £600,000 Help to Buy Equity Loan Scheme might be for you. Under the terms of the scheme, you can borrow up to 40% of the purchase price of a London property interest-free providing you are able to put down 5% deposit. You must start paying back the loan after five years. The scheme is scheduled to run until 2021.
Go for Shared Ownership
Shared Ownership is a government scheme where you can choose to purchase a share in a property - say 30% - and then pay rent on the remaining part that you don't own. In time you will be able to buy additional chunks of the property in installments not smaller than 10% - a process referred to as 'Staircasing'. When you staircase to 100% - and own the property outright - you will no longer need to pay rent to the agent you bought the property from.
Find Shared Ownership homes available through Peabody.