To get out of the rent trap and buy your own home, you'll need to raise a deposit. Saving a mortgage deposit is never easy. Expect to spend a few years coming up with one. But how to save for a mortgage deposit? Here are a few things you can do to get started.
Find out how big a deposit you need
Begin by setting a target. You can buy a home with as little as 5% and borrow the rest. Taking a look at homes in the area you wish to buy in will quickly give you an idea of the challenge. As a general rule, there are few London homes within Zones 1-3 on sale for less than £200,000. Therefore a minimum deposit would be something in the region of £10,000. If you're looking at bigger homes, you'll need to save more - or if you decide to forego any additional finance options, you may need to save up more than 5% to be accepted for a mortgage for your first home.
Whatever you decide - you'll likely have to make some decisions and possibly sacrifices to take your first step to home ownership. Read on to find out more.
Save regularly
Once you have worked out the mortgage deposit that need saving, make a plan to reach this goal. Remember - it is much more effective to save regularly than irregular one-off sums. However, you must be realistic from the beginning about how much you can afford to save per month or week. The Money Advice Service has a useful tool for tracking your spending and your savings.
Let your savings work for you
Your savings can earn you more money. Deciding where you are going to put your savings for a mortgage deposit is also important.
Consider opening a Lifetime ISA*. This type of savings account falls under a government scheme designed to help First Time Buyers... just like you! As long as you satisfy the conditions of the account, you can receive a monthly 25% bonus - just for saving regularly. Given that most ordinary savings accounts will reward you will around 3% (or less) monthly interest, the Lifetime ISA really is worth investigating.
If you've taken a look but you need more flexibility for your savings, it’s certainly worth shopping around to find a normal savings account with the best interest rates. This will help you with making the most of your money. If you'll be saving over several years you could rack up some considerable extra money from interest 💰
You should also keep checking that your savings account is paying off - we recommend comparing the market once a year to get the best rate! Check out the Money Saving Expert website for the best savings account - it’s also updated daily so gives you up to date advice.
What about my spending habits?
Using a weekly finance tracker can also give you an insight into where your money is going, and where you can cut down. Downloading banking apps to your phone makes this easier than ever before, but this only works if you make the effort to check them regularly! Put your banking apps on your home screen and get into the habit of checking them daily, or at least weekly, to keep a tab on your spending. Some banks are built specifically around high feature apps, such as Monzo and Starling Bank. They can ping you spending notifications, and the app will categorise your payments (for example into transport, eating out, groceries, entertainment etc) to give you an objective overview of where your money is disappearing to.
Other free apps and products exist to give you more control, or perhaps just more insight over your spending. Try Plum, which advertises itself as an "AI assistant" and gives you advice (and attitude) over Facebook messenger if you're thinking about whether to splash out on a holiday or save up for a new phone.
If you think that automation is the answer, then take a look at automatic saving apps such as Chip or Tandem. They give the option to round up your spending or to take regular payments and put them aside for you. Even better, these apps can analyse your regular bill payments and only save what you can afford.
When considering a new bank or banking app, do take a quick look at the financial protection it provides for your money. This article on Money Saving Expert provides some pointers, but as a rule, any UK-registered bank will protect your money up to a total of £85,000 in the account.
Monthly subscriptions are hassle-free... but that's not always a good thing
While you're using your shiny new banking apps to take a good look at your regular spending, you'll likely notice that you have a few monthly subscription payments. This could range from your phone bill (essential) to Netflix (probably necessary) to that gym membership that you meant to cancel 6 months ago (absolutely pointless).
Take a couple of hours to go through your subscriptions and direct debits. It can feel like a desperately boring way to spend an evening, but if you're able to cancel a subscription for a magazine that you never read, or an audiobook account that you never use, you're earning yourself money! Any time in the future that you decide to start a free trial, set yourself a calendar reminder so you don't forget to cancel.
The main money guzzler - renting
Rent is a big monthly cost for many of those saving to buy a home. Some experts say that if your housing costs are over 50% of your monthly wage, then you are severely cost burdened. The sad truth is that this is often the case for Londoners, due to exceptionally high rents. However, if you are prepared to be a little flexible, there could be ways of reducing your housing costs, which will up the amount you can put into your savings each month. Remember: short term sacrifices could help you achieve long term gains.
You could also consider the following.
Moving in with a family member
Parents, aunts, cousins... not everyone is lucky enough to have a family member living nearby, but if you do, chances are they would be happy to earn some extra income from a lodger.
Moving into a shared house rather than living alone
This can drastically reduce your bills as well as rent. If you'd rather not share bathrooms, look for a room with a private en suite. If cleanliness concerns you, choose a house share where the housemates agree to pay for a cleaner.
Moving to a cheaper area
If you're considering buying further out, why not get used to the area while you're saving? Getting area insights will allow you to make better decisions when choosing a home.
This may be a more drastic way to increase your saving power, and shouldn't be taken lightly. Moving for renters is now cheaper, thanks to the new ban on rental agency fees, but consider the impact it could have on your wellbeing and lifestyle. If you choose to move for the short term, make a plan, and keep it to a limited length of time.
Further ways of saving for a deposit
Here are five further money saving tips to help you save for a deposit:
Switch up your energy supplier
There could be up to 50 energy suppliers competing for your business, so make the most of a crowded market by shopping around and comparing the prices. Now that energy accounts are managed online, switching is easier than ever, and Ofgem have put together this handy guide to help you. You could save up to £250 a year by switching (that's a pretty good hourly rate if it takes just 1-2 hours to do the admin).
Make money from your parking space
If you're lucky enough to live in a rental property with a driveway, there are a number of websites which allow you to rent out your parking space to someone who needs it.
Shop for food online
Make the most of bulk buying and spot the deals by shopping online for cupboard staples, toiletries and longlife items. You can choose a delivery slot based on the price (Sainsburys and Ocado offer £1 delivery) and it will save you carrying it to and from the shop or carpark as well!
Check your phone bill
Loyalty doesn't always pay. If you've been with the same provider since you had your first Motorola Razr at age 16, it's likely that you've never looked at the alternative offers available to you. If you're happy with your handset and have finished paying it off, take a look at the market and switch to the best sim-only deal. Do you need unlimited data or could you manage with a smaller 5GB allowance?
Make some sacrifices
There are only a lucky few people who can genuinely save as much as they need, without making some sacrifices to their lifestyle or personal spending. Make some choices about what you can do without - it might be taking in lunch twice a week, or buying new clothes only once a month - by making a conscious decision and keeping to manageable goals and you're more likely to stick with it. Think about how future you will one day be reaping the reward by moving into your own home!
*Lifetime ISA, or LISA, was introduced by the UK government to replace the Help to Buy ISA, which was phased out in November 2019. Those who own a Help to Buy ISA can still benefit from a 25% government bonus when they use the savings to buy their first home, but the bonus is paid only at the time of the completion of the purchase. Both Help To Buy and Lifetime ISA savings and bonus can be used with the Proportunity Loan to buy your first home.
