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How to save for a deposit on your first home

How do I save for a deposit on my first home?

It's the question that plagues all first time buyers. Saving for a deposit on your first home is a real challenge, it is without a doubt the single biggest financial hurdle you will need to get over in order to buy your first home and likely the biggest financial challenge you will face in life.

There are three significant factors that amplify that modern first time buyers face:

  1. House prices are higher in real terms and as a percentage of earning than at any time in recorded history
  2. The demand for houses to own continues to increase due to:
    1. An increase in individuals investing in property (leveraging buy-to-let mortgages and historically attractive mortgage interest rate relief)
    2. The high level of net migration
    3. The increasing life expectancy across the UK
    4. The U.K. Governments failure to build sufficient new houses
  3. Mortgage lenders are tailoring products towards 10% plus deposit range, preferring to drive a minimum 90% Loan to Value (LTV) ratio to ensure that any downturn in the property market doesn't result in numerous lenders with negative equity financial challenges as witnessed in the later part of the 20th century.

Whilst this may all seem doom and gloom, there is light on the horizon. The Government has taken action aimed are reducing the demand for properties driven by investors. The action on buy-to-let investors was twofold:

  1. Stamp Duty Tax was overhauled and a tax threshold system put in place. The approach is similar to PAYE income tax whereby the more the property costs, the higher the rate of stamp duty tax that is applied. You can view the stamp duty thresholds, associated tax rate and calculate how much stamp duty is due on a property using our Stamp Duty Calculator.
  2. Mortgage Interest Relief is being phased out. In very simple terms, a landlord was able to claim back 100% of the interest charged by the mortgage lender. This will reduce every year from 2017 until it is phased out in 2020. At this point, landlords will not be able to claim Tax relief on mortgage interest. You can view more specific detail and see examples of the income tax that landlords pay as the changes occur using our landlord income tax calculator. The changes really are significant and should result in more properties returning to the market. This in turn will mean more choice, less demand and should in turn mean property prices start to stagnate or come down.

In addition to point 2, the UK's decision to exit the EU will result in some economic uncertainty whilst policies are defined and trade agreements established. A likely by product of this is increases to the Bank of England interest rates. Whilst this will inevitably lead to an increase in Monthly mortgage repayments meaning first time buyers will need to budget accordingly, it will also mean that property investors will be increasingly attracted to investing their money outside the property market and further drive down property values as they sell off their assets (their properties). It is of course difficult to quantify as there are many economic considerations but, on the whole, this is good news for first time buyers. Any ease in demand and reduction in prices will mean smaller deposits and more opportunity to get on the property ladder.

So, there are financial dynamics in play that could mean you will need a smaller deposit that you had previously considered.

Funding a mortgage deposit.

With mortgage deposits for first time buyers typically reaching into the tens of thousands of pounds, it is important to have a solid financial budget in place and to consider wider options and financial opportunities to meet the minimum deposit requirement. We will cover some of the opportunities that you can explore, there are also calculators adjacent specific options to allow you to produce some bespoke calculations and start to produce your own financial plan to save for your deposit.

Count the pennies

The best savings plans are those you don't notice. Most people find it difficult to save, particularly for a large sum as it is something they are constantly aware of, almost like a sacrifice (as it can be for some, sacrificing social activity, holidays etc. to meet their savings target). To make things worse, savings for a deposit for a mortgage is not a one or two month savings plan, it can take years. Previous generations of homebuyers really don't appreciate how difficult it is for first time buyers in the 21st century. Those who purchased their properties in the 1980's could get a mortgage deposit together in a matter of months by substituting the odd meal for beans on toast and avoiding the pub on a Friday. Sadly, those days are well and truly gone, the average first time buyer would have to make the same sacrifices for 7 to 10 years. Why? The simple answer is that house prices have risen well beyond that of salaries in the UK. The calculation for mortgage affordability is still based on similar rates of annual income. The net result is a disconnect between generations as the older generation of homebuyers fail to understand the challenges that their children and grandchildren now face.

The lack of understanding can make it more difficult for you to save, others may not understand your personal austerity and it will require some solid determination to get you through. The good news is that if you create a plan and stick to it, you will own your own home in the end.

There are several ways you can start to save:

  1. Monthly savings plan: Invest a specific amount of your income each pay day into a savings account. Shop around and you can find a number of savings plans that are geared towards first time buyers savings for a deposit. You can calculate the interest you can expect to earn and the duration you will need to save for using our Mortgage Deposit Calculator.
  2. Daily savings: Take a look at your daily expenditure, cutting back on a coffee or selecting a cheaper lunch option can quickly save you more than you might at first imagine. Our Deposit Boost!!! Daily Spend Savings Calculator provides examples of how those small changes add up.
  3. Piggy Bank: You can pick up sealed cans which can be used to deposit small change. If you smoke, trying stopping and putting the money you would spend on cigarettes into the tin. This will reduce the amount of time you need to save for a deposit as well as affording you health benefits. You can also leave a tin out and label it 'Donations welcome to help us buy our first home', small change from family always helps.

The second job

Taking a second job can seriously boost your income and mean saving for a deposit becomes far quicker. Accessing a second job can be tricky however, you will need to dovetail the job in between you first job and private life. Not everyone can manage two jobs but, those who do reap the rewards far quicker. Having a second job also tends to reduce the amount you spend as you simply have less time to spend your money. If you do take a second job be careful that your second job doesn't have a conflict of interest with your primary job. You should also be careful to ensure that the pressure doesn't build up and you become overly tired or stressed, owning your own home should not come at the cost of your personal health.

Support from your family

Move in and avoid the cost of rent

If you family have room and you feel you could cope with living with them without straining relations then moving in for a period is a good win. The money you can save on rent can all be invested and could see you save enough for your deposit with 1 to 3 years depending on the mortgage you require. This is not always an easy solution though, particularly if you have a family of your own and are used to living in your own property, rented or otherwise.

Equity release from a an owned property

If you have parents who own their own home, it is worth engaging them in conversation to see if they would be prepared to offset the deposit against their own home. Many parents will do this to support their children though not all are that understanding. At the end of the day a conversation costs nothing so it is worth exploring.

Government schemes for homebuyers

In a bid to support first time buyers and those trying to move home in certain circumstances the UK government has a number of schemes which can help you to buy your property.

Government home buying schemes can mean that the amount you need for a deposit can be significantly reduced and/or the cost of moving, Monthly household budget increased and subsequent monthly payments are reduced.

Starter Home scheme

The Starter Home scheme focuses on the under 40 age bracket, aiming to provide new build homes at discounted rates (a minimum of 20% off the market price). You can find our more about the Starter Home scheme and register your interest here

Help to Buy

Help to buy is designed to support those who already have a deposit saved. You will need to have a minimum of 5% deposit to access a help to buy scheme and the property purchase price cannot exceed certain amounts (amounts vary depending on where you live). There are two flavours to the help to buy scheme:

  1. Mortgage Guarantees: With this help to buy scheme the government agrees to cover any losses the mortgage lender may suffer should you be unable to repay the mortgage in full for a number of defined reasons. You are of course still liable for the monthly repayments. This scheme can be used on new build and old properties in the UK but ends on the 31st December 2016.
  2. Equity Loans: The equity loan scheme allows you to borrow up to 20% (40% if living in London) of the purchase price of the property directly from the government. The loan from the government is interest free for the first five years.

Right to Buy

The right to buy or right to acquire scheme applies to tenants who live in England, Wales and Northern Ireland and rent their property from the council or , in certain situations, from a housing association.. This initiative allows the individual or couple renting the property to buy the house at a reduced rate, discounts applied based on the duration that they have rented the property.

The right to buy scheme has attracted some negative press as the number of council houses available is very small compared to several years ago meaning most families are forced to rent privately. Those who rent a council house have the benefit of cheaper rents and the opportunity to buy their rented house at a huge discount. This luxury is not afforded to those who rent privately, an issue that the government does need to investigate and realign to ensure fairness of policy across the UK for citizens regardless of their circumstances.

Shared ownership

The shared ownership initiative allows you to buy part of a home and pay rent on the remaining amount. In simple terms you will need to secure a mortgage that covers between 25% and 75% of the property purchase price. You will need to make monthly mortgage repayments on that amount and pay rent on the remaining amount to the housing scheme that operates the shared equity scheme. Maximum household income thresholds apply and the amount (percentage) of equity share may be capped initially be the housing association but you can continue to buy more of the house by either extending your mortgage or taking a new mortgage once you repay the existing one. Note that all equity share properties are leasehold properties so you may also have to pay for shared repairs or communal area upkeep.

Co-Ownership in Northern Ireland

This scheme is similar to the shared ownership initiative though limited to Northern Ireland and the amount you own starts at 50% going to a maximum of 90% of the property so, unlike the shared ownership scheme above you can never own the property outright.

First Steps London

Similar to the right to buy scheme this government scheme is designed to support, what the government refers to as 'modest earners' (low income in real terms) secure a property to rent or buy. There are a number of caveats and limitations on this initiative, predominantly earnings based.

Make your deposit go further

Negotiate on new builds

New build properties are frequently overpriced, the pricing structure edged on high demand feeling a desire to buy regardless of cost. We conducted a mystery shopper approach on 5 separate new build developments. On 4 of the 5 sites we visited and talked with, we were able to negotiate a minimum 5% reduction on the advertised sale price with one site being prepared to discount just over 11% on the price advertised. The key factor here is timing. Look for new build sites which are being built in phases. The company running the new build project will typically be looking to fund the new phase(s) from the profits generated from the sale of the previous phase(s). If sales have not met expectation and/or they are keen to progress with the next phase you will be able to leverage a good deal. Almost everyone negotiates when they buy a previously owned home, ironically few consider negotiating on new builds. You may even find a new build opportunity where they will support or part fund your deposit.

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