How to save for a mortgage deposit

Saving for a mortgage can be daunting, especially when you typically need a 10% deposit. Here’s our guide to help you save...

Saving for a mortgage can be daunting, especially when you typically need a 10% deposit. Here’s our guide to help you save...

Daniel Evans
Mortgages expert
7
minute read
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Posted 3 JANUARY 2023

Saving for a mortgage deposit

A hike in annual inflation, the highest the UK has seen since May 2003, has led to a 15.5% increase in house prices over the past year – unwelcome news if you’re trying to get a mortgage. According to the Office for National Statistics, in July 2022, the average cost of a house crept up to £312,000 in England, £220,000 in Wales, £193,000 in Scotland and £169,000 in Northern Ireland.

With a minimum deposit of 10% usually needed for a mortgage, saving can be daunting, especially in the current economic climate. But if you can manage to save a bigger deposit, it can help you get the best possible mortgage deal. Read our guide to learn more.

What is a mortgage deposit?

Very few people can afford to buy a house outright. That means most of us will have to take out a mortgage – a large, long-term loan that’s paid back, with interest, in instalments over a set number of years.

But before you can get a mortgage, you’ll need to put down a lump sum of money that you pay upfront – in other words, a deposit. Your deposit is the percentage of your home that you’ll own outright, also known as equity.

Once you’ve paid the deposit, the rest of the sale price of your new home will be covered by the mortgage. So, for example, if you put down a 10% deposit, you’ll have 10% equity in the property at the outset and the remaining 90% will be your mortgage. Your equity share will vary as property prices fluctuate.

The amount of deposit you have not only determines the size of your mortgage, but also what interest rate you’ll be charged. Typically, the larger your deposit, the more chance you have of getting a better deal with a lower interest rate.

How big does my deposit need to be?

Typically, the bigger your deposit, the better. A larger deposit means a smaller mortgage loan, lower interest rates and access to better mortgage deals. That’s because with more equity in your home from the outset, you’re seen as less of a risk to your mortgage lender.

Each additional 5% gives you better mortgage terms, and a 20% deposit could open up good mortgage rates. Based on the average property price in England, a 20% deposit would cost around £62,400.

A 95% mortgage is the biggest mortgage you can get. Although it may still be possible to get a mortgage with just a 5% deposit, it’s likely only a small number of these are available.

Are there any schemes that can help me save for a mortgage deposit?

Whether you’re aiming for a 10% or 20% mortgage deposit, it’s a lot of money to pull together. But there are Government schemes available to help you afford your dream of home ownership. Look out for:

Lifetime ISA
A Lifetime ISA, also known as a LISA, is a tax-free way to save for a deposit that also gives you a bonus from the government. You can pay up to £4,000 per year into a LISA and the government will give you a 25% bonus (up to a maximum of £1,000 per year). A Lifetime ISA counts towards your total ISA allowance of £20,000 a year (tax year 2022-23).

LISAs are designed to help people buy their first property – which currently must cost less than £450,000 – then continue saving towards a pension, if they want. If the money is used for something other than buying your first home or you withdraw it before you’re 60 (unless you’re terminally ill) you’ll pay a 25% penalty on the withdrawal.

See more on using a Lifetime ISA to buy a home.

Mortgage Guarantee scheme
Allows buyers with just 5% deposit to apply for a 95% mortgage from a participating lender up until 31 December 2022.

Help to Buy – equity loan scheme (2012-2023) 
Available to first-time buyers in England who want to buy a new-build costing £600,000 or less. You’ll need a 5% deposit, but you can then borrow 20% of the property’s value (or 40% in London) for the first five years, interest-free. Your mortgage will make up the rest. Sadly, the Help to Buy: Equity Loan scheme is due to end on 31 March 2023.

Right to Buy/right to acquire  
This gives qualifying tenants who rent from their council or local housing association the right to buy their home.

Shared ownership  
Allows you to jointly own a property with a landlord – usually a council or housing association. You’ll only need a mortgage for your share and you’ll pay rent at a discounted rate on the share owned by the landlord.

First Homes scheme
Designed to help first-time buyers and key workers onto the property ladder. Homes are offered at a discount of 30% to 50% off the market price. The property value, after discount, must be no more than £250,000 (£420,000 in London).

Affordable home ownership schemes in Scotland, Wales and Northern Ireland are slightly different to those in England.

How to save for a mortgage deposit

Getting the money together for a decent deposit may seem like a mountain to climb, but with a clear and realistic figure in mind – and a few sacrifices here and there – it is achievable. Start saving as soon as you can. Even if buying a home is not yet on the horizon, saving just a little over a few years can start to add up. And when you start saving for a deposit more seriously, even small changes can make a difference to your savings pot.

Here’s a few tips on how to make saving for a mortgage deposit a little easier:

  • Cut the cost of your rent – if moving back in with your parents isn’t an option, consider flat-sharing, short-term housesitting or moving to a smaller, cheaper place.
  • Shop around – it’s worth comparing essentials like broadband and mobile phone packages to see if you can find cheaper deals.
  • Pay for insurance upfrontpaying for your car insurance monthly means you’ll be charged interest. It could add as much as 10% to your premiums compared to paying annually, so pay upfront if you can.
  • Cancel unused subscriptions – if you’re not using your gym membership or streaming services enough to justify the cost, cancel them.
  • Cut down on everyday spending – take advantage of supermarket offers and limit treats like takeaways, nights out and clothes shopping sprees to every now and again.
  • Use a savings/budgeting app – these can be great for tracking your spending, setting a budget and piggy-banking your spare cash instead of spending it. You can then transfer what you’ve saved to a savings or high-interest current account.
  • Make extra money – boost your income with a part-time job or ‘side hustle’ selling your stuff on platforms like eBay, Gumtree and Facebook Marketplace.
  • Keep an eye on your savings – some old savings accounts pay barely any interest. Have a look around and see if you can find a better interest rate and make your money work harder.
Author image Daniel Evans

What our expert says...

“There aren’t any shortcuts when saving for a mortgage deposit. But being savvy about where you keep your money and taking advantage of Government saving schemes can make your money work harder. It will all be worth it when you’re the proud owner of your first home.”

- Daniel Evans, Mortgages expert

Frequently asked questions

What if I have money in a Help to Buy ISA?

The Government’s Help to Buy ISA scheme, which gave first-time buyers the chance to boost their mortgage savings by 25%, closed on 30 November 2019. If you opened and deposited money into a Help to Buy ISA before then, don’t panic – you have until 1 December 2030 to claim your Government bonus.

How long do I have to save money in a Lifetime ISA before I can use it towards my deposit?

You must buy the property at least 12 months after you make your first payment into the Lifetime ISA. This gives the government the chance to add the bonus to your account. So, if you’re planning on buying a home sooner than a year, a Lifetime ISA may not be the right kind of savings account for you.

I'm buying a property with my partner. Can we each use our Lifetime ISA for the deposit?

Yes, if the person you’re buying your first home with has a Lifetime ISA, they can use their savings and government bonus too.

I have a Help to Buy ISA and a Lifetime ISA. Can I use the bonus from both for my deposit?

No. If you have a Lifetime ISA and a Help to Buy ISA, you can only use the government bonus from one of them to buy your first home.

You can transfer money from a Help to Buy ISA to a Lifetime ISA. If you transfer money from a Lifetime ISA to a Help to Buy ISA you’ll have to pay the 25% withdrawal charge. But don’t forget you can continue to use the Lifetime ISA to save towards your pension, if that makes sense for you financially.

Is a fixed rate bond a good way of saving for a mortgage?

If you’re happy to lock your money away for a set period, it might be worth considering a fixed rate bond (or term account). Fixed rate bonds are unsuitable for regular savings, but they can be used to invest a lump sum that you’ve already built up. Usually, the longer you’re willing to set your money aside, the higher rate of interest you’ll get. Be sure to check the terms and conditions for any minimum or maximum deposits.

Also be aware that if the Bank of England base rate rises, interest rates on savings accounts usually will too. If you have a fixed-rate bond, you won’t be able to move your funds to another account to take advantage of this. But you should be protected from any fall in the Bank of England base rate.

What about saving with an instant access savings account or a current account?

You could save for a mortgage deposit using an instant access savings account. While the interest rates won’t be as good as a fixed term account, you’ll have instant access to your money if you need it. Plus, minimum deposits are likely to be a lot lower (often just £1).

Some banks pay high rates of interest on current account balances (up to a set level), so you might want to consider saving via a current account.

Can I get a loan to cover my deposit?

Getting a personal loan to cover your deposit might seem like an easy option, but it’s not the best idea. Don’t forget, your mortgage is a type of loan, so paying for your deposit with another loan makes things very complicated.

When you apply for a mortgage your lender will look at your credit history, which will show if you have any outstanding loans. They’re unlikely to accept you if they think you’re unable to save for the deposit yourself.

What do I need to get a quote?

To compare mortgage deals with Comparethemarket, we’ll ask you what the value of the property is that you want to buy, your deposit amount and how long you want to repay the mortgage loan. It’s as easy as that.

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