How to save for a deposit on your first home

Despite higher interest rates and high property prices, now is as good a time as any to buy a home, if you can afford it.

Interest rates aren’t going to drop anytime soon and neither are property prices.

While we have seen a slight decline in prices and there are more people looking than properties for sale, prices will remain high.

While that’s not good news for anyone saving for their first home, it’s the reality of the UK property market.

Which makes saving a deposit more important than ever.

How much deposit should you save?

The amount you should save for a deposit on a new home depends on various factors, including the property’s price, the type of mortgage you’re seeking, and the lender’s requirements.

Historically, the standard deposit was around 10-20% of the property’s value.

In recent years, higher deposit percentages have become more common due to lending regulations and affordability considerations.

Here’s a breakdown of the deposit amount and why it matters:

Deposit percentage: A common deposit percentage was around 10-20% of the property’s value. However, lenders often prefer larger deposits as they mitigate risk for the lender and may lead to better mortgage rates for the borrower.
Affordability and mortgage rates: Saving for a larger deposit has its advantages. A higher deposit reduces the loan to value (LTV), which is the proportion of the property’s value that you’re borrowing. A lower LTV is generally seen as less risky by lenders which can attract lower interest rates.
Lending criteria: Lenders have varying requirements for deposits based on the type of mortgage and your financial situation. Some mortgages, such as Help to Buy or shared ownership, offer options for lower deposits, often around 5-10%. However, these schemes may come with certain eligibility criteria and conditions.
Property prices: The amount you need to save also depends on the average property prices in the area where you’re looking to buy. In more expensive areas, a 10-20% deposit might translate to a substantial amount of money, making it essential to research the local market.
Additional costs: When budgeting for a new home, remember that the deposit is only one part of the cost. You’ll also need to consider other expenses like conveyancing fees, survey costs, stamp duty (if applicable), and moving expenses.
Financial stability: While saving for a larger deposit can be beneficial, it’s essential to strike a balance between a substantial deposit and maintaining a level of financial stability. You should still have a financial cushion for unexpected expenses and emergencies after purchasing the property.
Personal goals and timeline: Your saving goal will also depend on your personal timeline for buying a house. If you’re planning to buy in a few years, you might have more time to save for a larger deposit. If you’re eager to enter the property market sooner, you might opt for a mortgage with a slightly higher LTV ratio and a smaller deposit.

There are higher LTV mortgages around, 95% or even 100%. These can be expensive and the lender will look very carefully at your financial position before lending.

Basically, the higher your deposit, the less risk for the lender. The lower the risk, the lower the rate.

You have to balance that with how much house prices will increase while you’re saving and your current position.

If you’re in rented accommodation, how much rent will you be paying while you save the deposit? Is it more expensive than a 95% mortgage? Will you qualify for such a high loan to value?

If you have any doubts, I cannot recommend a mortgage adviser enough. They know the market better than anyone and can make recommendations based on your specific circumstances.

You won’t usually need to pay them either. They receive a commission when you accept a mortgage.