How to save for a mortgage deposit

1. Decide on your goal

When it comes to buying a house, your deposit is usually your biggest outlay. Saving up a large sum of money can seem daunting. So we suggest setting yourself an achievable goal, and breaking it down into smaller monthly amounts. This will help you to stay focused on turning your dream home into a reality.

Each lender uses their own criteria, but most require at least a 5% deposit. In this case, you pay 5% of the house value upfront and borrow the remaining 95% from the bank. The percentage you borrow (e.g. 95%) is known as the Loan to Value (LTV). The higher your deposit, the lower your LTV, meaning the less money you’ll need to borrow in the form of a mortgage.

The best deals tend to be reserved for those with 40% deposits. But don’t be disheartened, if you can put down 10% (or more) of the property’s value, you’ll increase your chance of acceptance, as you’ll appear less risky to lenders. A higher deposit should also give you access to more mortgage options, and lower interest rates.

How much money you should save also depends on a few other factors, including: 

• how long you want to save for
• how much you can afford to save each month
• house prices (the higher the price, the higher your deposit may need to be)
• the amount you can borrow as a mortgage (based on your individual circumstances and the lender’s criteria)

A good place to start is to find out how much you could borrow as a mortgage.

You can either use a mortgage broker (fees may apply) or go directly to the mortgage providers.

Most lenders have a mortgage calculator on their website, which can help you to gauge how much you’ll need to save. You can play around with these calculators by inputting different data (including deposit amounts) to see what impact it has on the results. Usually, the higher your income and deposit, the higher your property budget becomes.

Bear in mind that you don’t have to aim for the most expensive properties in your price range. This could lead to high mortgage repayments and financial difficulties further down the line. If you fall behind with your repayments on your mortgage, then the lender could repossess your property, in the worst-case scenario. Plus, the more you borrow and the longer your mortgage term, the more interest you’ll pay in total.

Other expenses to take into account include: 

• Valuation fee
• Mortgage arrangement fee
• Structural survey
• Solicitor fees
• Building insurance
• Stamp duty (first-time buyers won’t pay this on properties £300,000 or under)
• Removal costs
• Decorating and repair costs

2. Choose a savings account

If you don’t already have a savings account set up, you should look into opening one so you can safely stash your cash away and earn some interest.

We suggest that you shop around to find the best deal, by checking comparison websites or by going direct. As well as comparing interest rates, you need to find out if tax will be charged on the interest you gain. Also, consider how accessible you want the funds to be.

If you prefer to have access to your money at all times, then look into instant access savings accounts. On the other hand, if you don’t mind your money being tied up, then consider a fixed-rate account. These types of accounts restrict how often you can make withdrawals (and charge withdrawal fees). However, they tend to come with higher interest rates.

Or, you could think about opening an Individual Savings Account (ISA), where you don’t pay any income tax on interest. Your tax-free allowance is limited to £20,000 a year, which renews annually in April. Make sure the interest rate is competitive before you sign up.

The Help to Buy ISA is no longer available. It has been replaced by the Lifetime ISA (LISA).

The LISA is a tax-free savings account, designed to help people save for their first home, or retirement. With this new scheme, you can put in up to £4,000 a year. Plus you get an extra 25% bonus from the government - up to £1,000 a year. Check if you’re eligible on the government website.

3. Set up a direct debit or standing order

The next step is to set up a direct debit or standing order from your current account to your savings account. This means the funds will come out of your bank account automatically.

The amount you save per month depends on your overall savings target and how much you can afford to spare. 

Make sure you keep it realistic, or it’ll be difficult to stick to. For example, if you want to save £15,000 over three years, this will come to just over £400 a month. If this is too expensive, you could spread it over a longer period. Instead of saving £15,000 over three years, you could save it over five years instead. This would come to £250 a month.

4. Increase your income

As you may already know, when you apply for a mortgage, the lender will review your household income and expenditure to make sure you can afford the repayments on time, every time. They’ll also perform a ‘stress test’, to see if you could cope with a change in circumstances (such as an increase in interest rates in the future).

Each lender has their own criteria, but they’ll want to confirm that you have a steady income. This means less risk from their point of view.

One way to get in their good books is to increase your income, which should increase your affordability for a mortgage. You could increase your income in a number of ways, such as by: 

• checking if you’re entitled to benefits
• changing jobs, or taking on a second job
• getting a lodger, or moving into a cheaper flatshare
• getting 25% off council tax if you live alone

You could also build your deposit in a number of ways, for example:

• using cashback apps (like Shopimum and TopCashback)
• having a clear-out and selling items online
• make things to sell online (e.g. Etsy)
• reclaiming energy bill credit
• using loyalty cards in the shops
• claiming cashback when switching current accounts (depending on the provider)

Bear in mind, increasing your deposit won’t help you pass the lender’s stress test – which is focused on your permanent income. But the higher your deposit, the more likely you’ll be offered lower interest rates on a mortgage.

Remember you may have to pay tax on extra money you have coming in.

5. Pay off outstanding debts

It’s often worthwhile paying off your debts before applying for a mortgage. Lenders check documents like your credit report and bank statements to make sure that you’re in a position to maintain mortgage repayments. Any outstanding debts could potentially make it more difficult to get approved.

You need to weigh up your financial situation to decide whether to prioritise your debts over your savings. For example, if you’re paying more interest on your debts than you’re gaining on savings, then it might be worth paying off your debts first.

On the other hand, if you’ve got a 0% interest credit card and you’re earning interest on your savings, it could make more sense to pay towards both savings and debts at the same time (if this is affordable). Remember to keep an eye on when your 0% introductory period ends, as interest will apply afterwards.

6. Reduce unnecessary outgoings

As well as clearing your debts, you can reduce your outgoings by cutting back on unnecessary spending. Your outgoings can affect the amount mortgage providers are willing to lend you. So it’s best to try and live within your means - especially in the run-up to your application.

Go through your bank statements with a fine-tooth comb and pick out anything you could save money on. This could range from reducing the number of takeaways you buy to cancelling subscriptions. Or it could mean bigger changes, like moving back in with parents to save on rent.

Read on for more ways to stop spending.

7. Consider switching suppliers to cut the cost of bills

You may be able to get a cheaper deal elsewhere on things like your gas, electricity, mobile phone and broadband bills, for example. Utilising price comparison websites can give you an idea if there are any savings to be had.

We suggest that you do as much research as possible before switching - never just use a single site. Do remember though that there are other benefits to consider, such as extra care, or a provider’s sustainability policy.

8. Other ways to get a deposit together

If all else fails, think about whether a gift or loan from the bank of mum and dad would be realistic. Or consider clubbing together with family and friends and buying a place in joint names. This shouldn’t be taken lightly, as you have to consider what would happen when you sell the property in the future.

Mortgages are secured against your property. This means your home may be at risk if you fall behind with your mortgage repayments.

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