How to build a deposit for your first home

Building up a deposit for your first home can be daunting, but there are lots of things you can do to help you reach that milestone.

What's a house deposit for?

A deposit is required by mortgage lenders because the maximum they can lend on a property at present is 95% of the agreed price. If you are very fortunate to be able to buy a property outright, without having to borrow money, then you will not need a deposit but for the majority of us, we will often buy a property with the help of a mortgage.

Mortgage lenders, such as banks, require this deposit because it reduces the risk that they take on by lending you money for the property. It’s also good to own as much as your property as you can so putting down a deposit means you create equity in the property. This helps you get a better mortgage deal and means you have less debt to worry about.

Mortgage – A mortgage is a special loan used to buy a home. It is secured against your home which means the lender (usually a bank or building society) needs to make sure they are happy with the home you have chosen, before they will lend you the funds to buy it.. They will charge you interest for lending you the funds, and you will pay back the loan in monthly repayments that you are legally obliged to pay. Your home may be repossessed if you do not keep up repayments on your mortgage.

How do I know how much I need to save?

How much you need to save for a deposit depends on a few things, such as the type of property you’re buying, if you’re buying on your own or with other people, and what salary you earn.

The typical amount that we advise people to save is 10% of the full price of the property, so if you were buying a property for £200,000, you would aim to save £20,000 to put down as a deposit. You would then secure the rest of money (£180,000 in this example) through a mortgage. However, banks and lenders are currently offering 95% mortgages, which means you might only need to save 5%. For these types of mortgages, you will need a very good credit score. The mortgage rates tend to be higher than what you get for 90% mortgage deals.

To work out what you need to save for your own specific circumstances, start by thinking about the type of property you would like to buy, and whether you would be buying this alone or with other people..

Then, take a look on popular sites such as Rightmove and Zoopla in your chosen area to get an idea of what prices the types of property you want to buy are being sold at. You can typically borrow 4.5x your salary from a mortgage lender, but this is subject to deals at the time and your affordability. You can use our eligibility checker to see how much you could borrow.

Work out how much you could borrow, and what the difference is between that and the price of the type of property you want to buy.

It always helps if you’re able to save more than the minimum deposit amount. Increasing your deposit will lower the amount you need to borrow, so you’ll pay less interest back to your mortgage lender. You would also have access to more mortgage deals, potentially cheaper monthly repayments and more chance of being accepted by a lender.

It’s also important to not forget about the other costs you must save for when buying a property, such as mortgage and solicitors fees, moving costs and furniture. We’ve written more about that in our costs of buying a home guide.

What’s the minimum amount I need to save for a deposit?

How can a Lifetime ISA help me build a deposit?

You might have heard of Lifetime ISAs (they’re sometimes called LISAs), and they will be particularly interesting to you if you are a first-time buyer. If you are able to save money, are aged between 18 and 39 and hoping to buy your first property in the future, then opening a Lifetime ISA may be a good option for you.

An ISA (Individual Savings Account) is a tax-free savings or investment account that allows you to put your ISA allowance to work and maximize the potential returns you make on your money, by shielding it from income tax, tax on dividends and capital gains tax.

With a Lifetime ISA, you are able to save up to £4,000 a year, (in financial terms, tax years are April – April!) towards your first home. Every year, the Government will give you a 25% bonus on what you have saved. So, if you have saved £4000, the Government will give you an extra £1000 and you’ll be able to reach your deposit saving goals much quicker. There are a few things you need to know about Lifetime ISAs:

  • You must be aged between 18 and 39 to open a LISA  
  • You can continue to put money into the LISA until the day before your 50th birthday (once you are over 50, you'll continue to get interest or investment growth/losses, but you won't be able to pay in any more.
  • To get the bonus, you must use the funds for either your first property, or for retirement
  • If you withdraw the funds for anything other than a first property or retirement, you will face a penalty fee and lose the bonus
  • The property you buy has to cost £450,000 or less
  • You need be buying the property with the assistance of a mortgage
  • You need to have a residential mortgage, opposed to a buy-to-let mortgage (meaning you should be living in the property, rather than renting it out)
  • If you are buying with someone else, as long as they are also a first-time buyer, they can also take advantage of a LISA.

It is important to remember with ISAs and LISAs, the value of your investments can go down as well as up, so you could get back less than you invested.

What are the different help to buy schemes available?

The government has launched several different help to buy schemes over the years, some which have already closed and others which are due to end in the coming years. Here’s a list of all the schemes available.

Help to Buy Equity Loan

For people who are struggling to build up a big deposit, the scheme was launched in 2021, and is a loan from the Government that you can use to buy a new-build property specifically.

You will need a deposit of 5% of the full price of the home, but because you would combine the loan from the Government with a loan through a mortgage, you wouldn’t need to borrow as much from a mortgage lender, meaning you will have access to more mortgage deals. How much the Government will lend you depends on where you live, and you can find the value of a Help to Buy Equity Loan in your local area by clicking here.

One very important thing to note about Help to Buy Equity Loans is that the loan is for a percentage of the property you’re buying. This means, if the Government lent you 15% of the property price, when you come to sell the house, you will have to pay the Government back 15% of the value of the property when you sell it. So if your property has gone up in value when you sell it, you will pay back more than the initial loan. If the value of the property has gone down, you will pay back less than the initial loan.

This scheme is due to end in March 2023.

Shared Ownership Scheme

The Shared Ownership Scheme lets you buy a share of a property and pay rent on the rest. You can search for properties that are sold specifically under these schemes. You can buy up to 75% of a property and you would fund this share just like you would if you were buying the whole property. You would likely need a minimum 5% deposit, and the rest of the money you could borrow through a mortgage. This means that if you have a small deposit, or your salary doesn’t allow you to borrow enough to cover the whole property, you can take out a smaller mortgage and still become an owner.

There is a catch though! You will need to pay rent to the housing association, who will own the other percentage of the property. This will be on top of your monthly repayments to your mortgage lender. To apply for the Shared Ownership Scheme, or to find out more, click here.  

Help to buy ISA

The help to buy ISA scheme is no longer available, but a Lifetime ISA is a similar concept so we’d suggest opting for that if you’re looking to save.

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