Getting together enough money to fund a deposit for a house is a daunting task and it can take people years to save up the cash.
And with house prices on the rise - the average UK house price in June 2016 was £214,000, an increase of 9.3% over the year, according to the ONS – there’s little to say it’s going to get any easier.
How much you need to save depends on the mortgage you are getting; it’s worth spending time shopping around and seeing which companies are providing the best offers with low interest rates.
Most lenders look for at least a 5% or 10% deposit, but with many first time buyers struggling to raise the money, some companies are offering a 100% mortgage. But pay close attention to the interest rates – they’ll more than likely be a lot higher than the rates you’ll be offered with a bigger deposit.
How much will I need to save for a house deposit?
This depends on the cost of the home you are buying and how much of a deposit you want to put down. To help you get an idea, we’ve taken a look at the most recent average house prices in the UK from ONS stats (June 2016) and worked out how much you’ll need to save based on a 10% deposit.
The average house price in England is £229,000, so if you want to put down a 10% deposit you’ll need to save £29,000. In Wales, house prices increased by 4.9% in a year to stand at £145,000 meaning you’d need £14,500 for a 10% deposit.
The average house price in Scotland is a little cheaper at £143,000, meaning you’d need to save £14,300 to put down a 10% deposit. And in Northern Ireland, house prices are currently averaging £123,000 so you’d need to have £12,300 saved up.
As you can see, we aren’t talking about small sums of money no matter where in the UK you are looking to buy. You can use this handy calculator to help you work out how much you’ll need for the property you’re interested in.
How can I fund a house deposit?
Where you get the money for your deposit is a vital piece of information for mortgage lenders who will run credit checks on you when you apply for a mortgage. They will also ask for your last three months’ payslips and bank statements to make sure you can afford the monthly repayments.
Most first-time buyers will spend months saving up all their spare income to fund the deposit. Depending on your wage and outgoings this could be making small sacrifices like missing the odd night out or, on the opposite end of the scale, moving back to mum and dad’s to live rent-free while you save. Saving money takes discipline, so here are some tips to help you.
Stop renting/move home
Renting while you’re trying to save for a deposit will be very difficult; if moving home to mum and dad is a viable option for you, it’s a great way to save big sums of cash each month. Obviously this isn't necessarily an option for many people, especially when their parents have understandably downsized or are unable to accommodate them.
Get a lodger
If moving out isn’t an option, could you get a lodger to help cover the costs of your monthly rent and bills?
Budget – if you’ve never been one for budgeting, now’s the time to start. Sit down and look at your monthly outgoings and see if you can cut back on any unnecessary spending. Think things like your morning Starbucks; if you spend £3 every working day on a coffee it equates to £780 a year! Also look at subscriptions – do you need Netflix? – and the amount you spend on socialising
Take a look at all the different savings accounts on the market – see which ones offer the best interest rates and make sure you ask about switching benefits; many banks offer cash back and other incentives to get you to switch banks
If you’re lucky enough to have money given to you buy mum or dad for example, you can use this ‘gift’ to fund your house deposit. This is an absolutely fine way to source your deposit but many mortgage providers will ask the person gifting the money to sign an agreement which states they will not be requesting the money to be repaid at any point and that they have no stake in the property you are buying.
It must be a gift and not a loan. Some lenders will also stipulate that only immediate family members can gift the money.
Help to Buy
If you can only part-fund your deposit, one of the government schemes such as the Help to Buy ISA, Help to Buy Equity Loan or Shared Ownership could be the extra help you need.
The Help to Buy ISA boosts your savings by 25%. For every £200 you save, the government could give you a bonus of £50. The total government bonus you can receive is £3,000, and that amount is given straight to your solicitor once you buy a home. Savings are payable to each first-time buyer, not each household, so if there are two of you buying a home then you can have two ISAs and a total of £6,000 towards your home.
With the Equity Loan you will need to save 5% of the sale price of the property you are buying and the government will lend up to 20% of the sale price, the remaining amount (up to 75%) you get on a mortgage. This type of scheme is only available on homes costing up to £600,000 in England, £400,000 in Scotland and £300,000 in Wales. Find out more about Help to Buy.
Shared Ownership schemes are a mix of buying and renting a property; mainly aimed at first-time buyers who can’t afford to buy outright.
The properties are offered by housing associations - you buy between a quarter and three quarters of the property with a deposit and mortgage, with the option of owning more at a later date, and pay rent on the remaining share to the housing association. The properties are always leasehold which means you’ll also have to pay a service charge which will vary from property to property.
Not all lenders offer a mortgage for Shared Ownership purchases so make sure you check which companies are available.
For more information on the financial schemes for home buyers in the UK, see our guide on what help is available to people trying to get on the property ladder
Can I use a loan or credit card to pay for a deposit?
It is not advisable to use a loan to fund a house deposit; think of both the loan and the mortgage as debts – can you afford to pay off both? Many lenders will not approve a mortgage offer if the deposit is coming from a personal loan; a mortgage is only offered when lenders can see you are capable of paying back the ‘loan’ each month.
When carrying out your credit checks the bank or building society will look at your borrowing history and will check your deposit is funded by a non-repayable source such as savings or a gift.
If you do find a lender willing to accept a personal loan for the deposit it’s likely they’ll be willing to offer a lot less and with much higher interest rates.
Using a credit card to fund your deposit will be viewed similarly as a loan; a lender will only underwrite your mortgage if you have the ability to meet the monthly repayments. You will have to declare all your monthly outgoings and existing loans and having a big credit card balance will impact the lender’s decision and will more than likely lead to you being offered less.
Credit cards often come with very high interest rates so make sure you carefully look at how much you’ll be paying out each month – you could end up paying back more than you initially borrowed and potentially even after you’ve repaid your mortgage.
What is a guarantor mortgage?
Even if you manage to get a deposit together first-time buyers can sometimes have poor credit scores which is where a guarantor can help. Put simply, mum or dad, or any close relative, must agree to pay the mortgage repayments if you can’t.
Some lenders will offer a 100% mortgage with a guarantor, but a 95% - 90% mortgage is more common. The risk for the guarantor is they will be liable for your debt should you fail to make the repayments and it is a long-term commitment; a guarantor can only be released once the borrower can show they can afford the repayments on their own.
However, being listed as a guarantor will not affect your credit rating.
Speak to a mortgage broker
If you're unsure about how much you can afford to borrow for a mortgage, speak to a regulated mortgage broker rather than your bank. With an independent advisor you can be assured they are giving you unbiased advice and will show you the best mortgages on the market that suit your needs.
The Unbiased website lists a number of independent mortgage brokers available across the UK.
Finally, while a deposit will be your first big output you should be factoring in a number of costs such as solicitor’s fees, buildings insurance, which is often a condition of your mortgage, stamp duty and moving costs.