Where to start with saving for a house
With house prices seemingly often on the rise, saving for a house deposit can be a real challenge.
Like all challenges, this one is best tackled with a plan - and that plan starts with understanding how much you’ll need to save.
While it’s possible to buy a property with a 5% deposit in some cases, most mortgage lenders require a down payment of at least 10% of the property price.
Usually, the more deposit you can put down, the better, as it means you’ll need to borrow less. It also reduces the Loan-to-value (LTV) rate, which typically means you’ll get a better deal on your mortgage.
How much you might need to save
Taking the average house price in the UK as an example (£275,000 at December 2021), a 10% deposit would be £27,500. There are other costs like solicitors’ fees to add to that as well.
Of course, depending on where you live in the country, house prices could be significantly higher or lower than the average. You’ll need to do your research to see what property prices are like where you want to buy - and work out your target deposit from there.
Think beyond the deposit…
Your deposit is only part of the story. You’re relying on the mortgage lender to loan you the bulk of the purchase price, and this will depend largely on your income. Even if you set your heart on a £400,000 house, and can scrape together a £40,000 deposit, there’s no guarantee you’d get a mortgage large enough to seal the deal.
That’s why it’s important to check in advance what you might be able to borrow. There’s no shortage of mortgage calculators around that can help give you that insight and show you what your monthly repayments might look like.
Just make sure you build some reserve into your monthly payments in case affordability becomes tighter in the future.
How to save for your deposit
Just as it’s important to be realistic about what kind of house and mortgage you can afford, it’s crucial to set a realistic timeframe for saving up the deposit. Estimates suggest it can take an average of 3.5 years for a couple to save their deposit, and that rises to 13.5 years if you’re buying alone.
Again, much will depend on your salary, and what you can afford to set aside each month. Start by working out a base monthly figure that you can comfortably afford after all your regular outgoings. Then look at areas of your spending that you might be able to cut back on to build your deposit more quickly.
Where could you save?
Energy bills, broadband and mobile packages often represent a chance to save if you’re prepared to shop around. Cutting back on your daily coffee or weekly takeaway could make a huge difference over the course of a year, too. Replacing a £3 coffee each day with one from home could save you over £1,000 a year.
If you wanted to save a £25,000 deposit in 5 years, assuming no growth on your money, you’d need to put aside £416.67 a month (just over £208 each if you’re buying as a couple). With your money in the right savings account though, you might be able to get there sooner - and for less.
The best accounts for saving for a house
It can be hard work to save for a mortgage deposit, so it’s important you make your money work hard too. Below we’ll look at some of the types of savings account you might want to consider for building up your deposit - but remember, what’s right for you will depend on your own circumstances.
We don’t provide Lifetime ISAs here at Wesleyan, but it’s only fair to include them in this discussion. Lifetime ISAs are tax-free accounts designed specifically to help young adults save either for their first home or for retirement, and are available to those between 18 and 39 years old.
You can save up to £4,000 a year in a Lifetime ISA, out of your full £20,000 ISA allowance (if you’re unfamiliar with ISAs, check out our guide to how ISAs work). Whatever you save, the government will add an extra 25%, meaning a maximum ‘bonus’ of £1,000 a year.
As you might expect though, there are some compromises. You can only use the funds you save in a Lifetime ISA for houses costing less than £450,000, and if you take money out before the age of 60 for any other reason than your first home, there’s a 25%* withdrawal fee to pay*.
On savings of £25,000, a 25%* withdrawal fee would be £6,250 - meaning you’d get less back (£18,750) than what you contributed (£20,000) if you had to spend the money elsewhere.
|Government contribution of up to £1,000 per year until your 50th birthday|
|Can pay in monthly or in lump sums|
|Contributions limited to £4,000 per year|
|25%* charge for withdrawing early|
|Can’t be used if you’ve ever been on a title for any UK property|
As mentioned above, you can only save £4,000 per year into a Lifetime ISA. If you’re in the fortunate position of being able to save more than that, you can do so tax efficiently through a cash ISA.
Any interest you earn on your cash ISA is protected from income tax and capital gains, so it can all go towards your deposit. And when you need to take your money out, you can usually do so quickly and easily without any exit fees.
|Pay no tax on your interest|
|Withdrawals usually free of charge|
|Low interest rates mean little potential for growth|
|Inflation may eat away at the real value of your money|
Stocks and shares ISA
A stocks and shares ISA allows you to invest your money in stocks, shares and other assets, while taking advantage of the ISA tax wrapper. You can hold a stocks and shares ISA alongside a cash ISA and a lifetime ISA.
You don’t necessarily need to be a stock market expert to invest in one, because most (like Wesleyan’s With Profits ISA and Wesleyan Unit Trust Managers' Unit Trust ISA) are invested in funds which are professionally managed on your behalf.
By investing your money, you may be able to grow your pot faster than in a cash ISA - and there’s no tax to pay on any returns from your investments. You can also see how investing could lessen the impact of inflation using our inflation calculator.
However, the value of all investments can go down as well as up, and you could get back less than what you put in.
Because of that volatility, investment products like stocks and shares ISAs are usually best for people who can invest for a minimum of five years. If you’re looking to buy a house sooner than that, your money might be best elsewhere.
|Provides greater potential for growth than a cash ISA, mitigating inflation risk|
|No capital gains tax to pay on any investment returns|
|Investments can go down in value as well as up, and you may get back less than what you put in|
|May not be appropriate if you’re looking to buy in the next 5 years|
Of course, these accounts are by no means your only options. You can explore a wide range of savings and investment products here.
Stay in the saving habit
It can be a long road to your first house, but when you do finally have the keys to your own place, it’s important you keep the saving habit going.
If you can keep putting a little money into your savings each month - once you’ve splashed out on that new sofa, anyway - you’ll be in a much stronger position when it comes to your next move.
After all, few first-time buyers are buying their ‘forever home’, and it might not be long until you’re ready for the next rung of the housing ladder…