Some people are fortunate enough to have enough money to buy a property outright. Most of us, however, will need to save up for a mortgage deposit. How do you overcome this challenge?
Fortunately, many strategies are available to help you save efficiently for a deposit. In this article, we offer five ideas to help you on your journey towards becoming a homeowner.
#1 Use the government
Whilst you cannot purely rely on the state to get on the housing ladder, a range of schemes exist which can help you reach your goal faster. A great option is the Lifetime ISA.
In 2022-23, you can put up to £4,000 into a Lifetime ISA (also called a LISA) each tax year and the UK government will “top up” your contributions by 25% – up to £1,000.
Over five years, for instance, you could get a £5,000 “bonus” from the government if you fully use your ISA over that time. Your partner is also entitled to their own LISA allowance. So, together you could get £10,000 from the government in the same time period.
Be careful to consider the rules about LISAs before committing to one. In particular, you can only use the funds towards the purchase of a first home (or for retirement). If you withdraw funds for any other reason, you will face financial penalties. You can find the current full LISA rules by clicking this link here.
#2 Set realistic goals
It can be difficult to face up to the reality of what you can afford. Young couples, for instance, may dream of starting in a semi-detached house with a large garden where the children can run around. For some people, however, this may be out of their budget.
For instance, you could start your family in a 2-bedroom flat. This would likely be cheaper and gives you a chance to establish yourself in the local area, building up equity along the way. When you later come to sell, hopefully, the increased value of your home will help you buy a larger property.
It helps to have a clear saving target in mind. For example, if your desired property is around £250,000, then achieving a 10% mortgage deposit will mean saving at least £25,000.
You can then divide this figure by the number of months/years it will take to attain it. For instance, over 5 years you would need to save £5,000 per year (i.e. about £416 per month). If you and your partner saved together, then you could both contribute £208 per month.
#3 Make your income work harder
How could you increase the income you want to commit towards a mortgage deposit?
There may be a range of options available to you. For instance, what are the salary prospects of your chosen career? If they are fairly low, would it be desirable and realistic to move into a new line of work which offers higher career earnings?
If this is not an option, consider your budget. Are you spending more than you need to? Consider drawing up a budget and try sticking to it.
Elizabeth Warren suggests the 50/20/30 rule, which involves spending 50% on needs, 30% on wants and 20% on savings. For instance, if you earn £2,000 per month (net of tax), then £400 could go towards your mortgage deposit savings
Maybe you could ask for a pay rise at work. Or, perhaps you could start a side business to provide extra income to put towards savings. Consider cutting out expenses which do not bring you joy and which simply amount to waste (e.g. unused digital subscriptions).
#4 Get help
There is no shame in asking for financial support from parents or other family members.
In some cases, loved ones may be able to lend you money or even make a gift. The latter can, sometimes, even be in the giver’s interests too.
For instance, in 2023-24 an individual can give away up to £3,000 (e.g. to a child for a mortgage deposit) without an inheritance tax liability. In effect, making gifts could help your parents reduce their taxable estate whilst also helping you onto the property ladder.
In other cases, a family member might want to lend you money – hopefully, with better terms regarding interest and repayment compared to a bank.
Whatever approach you use, consider putting everything down in writing so that everyone agrees, helping to avoid misunderstandings and disputes later.
#5 Be patient
It takes time and discipline to build a mortgage deposit.
We all struggle with delayed gratification – especially when it comes to a fundamental human need like gaining shelter (i.e. a house to own). Yet the process can also be an opportunity.
For instance, taking time to save for a property allows you to figure out what is truly important to you in this future purchase. Do you want a guest room? What about a garage or a garden?
Over time, your priorities and needs might change. Perhaps you get married or have a child. Maybe your career changes or wider family circumstances evolve.
Be patient and try to enjoy the journey. This will help you forge a healthy habit of saving and instil greater discipline over your finances – serving you well in the future.
The Financial Conduct Authority do not regulate tax planning
The content in this article was correct on 05/07/2023.
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers independent financial advice on savings, pensions, investments, protection and mortgages for teachers and non-teachers.
Please use the contact form below to arrange an informal chat with an adviser and see how we can help you.