Buying your first home is an exciting milestone, but it can be daunting too. Saving for a mortgage deposit can be one of the biggest challenges of all, as you need a sizeable lump sum to get started. Fortunately, there are many ways to save and there are lenders who will consider deposits from sources other than your own savings. Here we'll talk you through the various options available to first-time buyers looking to get on the property ladder and look at how you could boost your deposit savings.
Why do you need a mortgage deposit?
When it comes to buying your first home, one of the most important factors to consider is the mortgage deposit. A mortgage deposit is the amount of money you put down upfront when purchasing a property, and it plays a crucial role in the home-buying process.
Most importantly, your deposit demonstrates to lenders that you are responsible with your finances and capable of saving money. It shows them that you have the ability to manage your income and are committed to the investment that comes with owning your own home. This is important because lenders want to ensure that they are lending to someone who is likely to repay their mortgage on time.
When you have a larger deposit, you pose less risk to the lender, and they may offer you a lower interest rate as a result. This can save you a significant amount of money over the lifetime of your mortgage. Similarly, the deeper your deposit pot, the more you may be able to borrow from lenders and potentially afford a larger or more desirable home.
So, how much should you save for your mortgage deposit?
When it comes to saving for your deposit, the big question is always how much should you aim for? Whilst there is no set value, the general rule in the UK is a minimum deposit of 5 to 10% of the property purchase price so if you’re looking to buy a new home for £250,000 you’ll be expected to put down between £12,500 and £25,000 for your deposit. Some lenders offer more competitive mortgages where the minimum deposit percentage is smaller however this is usually dependent on your affordability. It’s always beneficial to speak to an independent financial advisor to discuss your options.
Useful ways to save for your deposit
Saving for a mortgage deposit can feel overwhelming, but there are some ways you can boost your savings and reach your goal faster. Here are some ideas to help you save for your deposit:
- Track your finances and create a budget: It’s highly beneficial for you to know exactly what comes in and goes out every month so you can start reviewing your spending habits and identify areas where you can cut back. Look for non-essential expenses that you can temporarily eliminate or reduce. Consider cooking meals at home instead of eating out, cancelling unused subscriptions, or finding cheaper alternatives for entertainment.
- Set up a savings account (and don’t dip into it): By opening a dedicated savings account, specifically for your deposit, you’ll be able to ring-fence a set amount of your income each month. This will help you separate your savings from your regular spending and make it easier to track your progress but most importantly - don’t dip into it for a treat!
- Save when you spend: A lot of banks these days have automatic saving opportunities that help you to save by rounding up your transactions to the nearest £1, £5 or £10 and putting that additional amount into a savings account. Even small amounts add up over time.
- Cut back on rent: This might be one of the most difficult ones to do and won’t apply to everyone. If you're currently renting, you could consider downsizing or moving to a more affordable area. This can significantly reduce your monthly expenses and free up more money for your deposit savings. Perhaps you could even explore shared living arrangements or an additional housemate to reduce your living costs even more.
- Could you achieve an extra income? If you have time on your side outside of your regular job, another source of income might be achievable. This could include taking on a part-time job, freelancing, or starting a side business. Use the extra income solely for your deposit savings and watch your balance grow faster.
- Shop around and negotiate your bills: Don't be afraid to negotiate your bills to try and get better deals. Contact your utility providers, insurance companies, and internet providers to see if you can reduce your monthly expenses. Every little bit saved can make a difference and will play a part when lenders review your affordability.
- Save gifts: When friends and family ask what you might like for your birthday or for a gift, take the opportunity to boost your deposit. If a grandparent pops a £20 note in a birthday card, resist the urge to spend it and put it straight into your savings.
Could your family or friends fund your deposit?
If you're struggling to save enough money for your mortgage deposit, don't worry - you're not alone. One option that many first-time buyers explore is seeking financial assistance from family members and some lenders also allow contributions from friends too. This can be a great way to boost your deposit savings and get a foot on the property ladder sooner rather than later.
Firstly, it's important to have an open and honest conversation with your loved ones about your plans to buy a home and your need for financial support. Discuss how much you need and how the arrangement will work, including whether the money will be given as a gift or a loan. Be sure to put any agreements in writing to avoid misunderstandings later on.
Lenders may view gifted deposits favourably, as it demonstrates that someone is willing to financially support you. However, keep in mind that lenders will typically require a "gift letter" stating that the money does not need to be repaid.
Another option is to ask for a loan from family or friends. In this case, it's important to establish clear terms, including interest rates and repayment schedules. Be sure to treat the loan as a formal agreement and document it properly to protect both parties involved.
Additionally, some parents may choose to act as a guarantor for their child's mortgage. This means that they agree to be responsible for the mortgage repayments if the borrower defaults. Guarantor mortgages can help first-time buyers with smaller deposits access more favourable interest rates and higher loan amounts.
Remember, when considering options for funding your deposit with family and friends, it's important to approach the situation with transparency, clear communication, and proper documentation. Always seek legal and financial advice to ensure that everyone involved is protected and aware of their responsibilities.
If you plan to use funds from a non-personal savings source, it's essential to provide the necessary documentation to prove the legitimacy of the funds. Lenders will require a clear paper trail, including gift letters, bank statements, and legal documentation if necessary. It's advisable to consult with an independent financial advisor or mortgage broker who can guide you through the process and determine what options are available for you.
Finally, whilst deposits are a critical way to achieve a mortgage on your first home, keep in mind that lenders will also assess your affordability status. Affordability is determined by your income, expenses, and more importantly, your credit history. Lenders must be certain that you can comfortably afford the monthly mortgage repayments in addition to your other financial commitments it's therefore important that you maintain a good credit score, pay off existing debts, and manage your finances responsibly to increase your chances of buying your first home.
