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How to save for a mortgage

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Saving for a mortgage

If you’re a first-time buyer looking to get on the property ladder, you’ll need to save for a deposit to get the best mortgage deal possible. Don’t know where to start? Read our handy guide…

Frequently asked questions

What is a mortgage?

A mortgage is a type of loan that you use to buy a property. The property acts as security for the bank or lender if you default on your loan (you don’t make the monthly payments for a long period of time), as the lender can take ownership of the property (repossess) and sell it to get back their money.

With a mortgage, not only do you have to pay back the money you’ve borrowed, you also have to pay interest – which can be at a fixed or variable rate.

How big does my deposit need to be?

When it comes to getting a mortgage, generally the bigger your deposit, the better. But, typically, the minimum deposit you’ll need is 5% of the property’s value (although 95% mortgages tend to be limited in availability). Having a decent deposit means you should be able to access mortgage deals with more favourable rates of interest.

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, then consider a fixed rate bond (or term account). The longer you’re willing to set your money aside then, generally, the higher rate of interest you’ll get – but check out the terms and conditions for any minimum or maximum deposits.

Just be aware that should the Bank of England base rate rise, interest rates on savings account usually do too. You won’t be able to move your funds to another account to take advantage of this throughout the duration of a fixed rate bond.

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

You could save for a deposit for your first home 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.

How does a help to buy ISA work?

Available to first-time buyers only, a help to buy ISA is a saving scheme whereby the government will boost what you save by 25%. So, for every £200 you save, the government will pay a £50 tax-free ‘bonus’ to go towards your first home.

You can deposit £1,200 into the ISA during the first month, then up to £200 a month after that. The maximum bonus you can get from the government is £3,000, which you'd receive if you saved £12,000. The minimum you need to save to qualify for a bonus is £1,600 (generating a bonus of £400).

You’ll get the government bonus when you buy a property; if you decide not to buy one, then you won’t get the extra money. The bonus part of a help to buy ISA is paid per person, so if you’re planning on buying a home with someone else and you’re both first-time buyers, you’ll get double the money.

You can open a help to buy ISA until 30 November 2019 and you must claim your bonus by 1 December 2030.

Are there any schemes that can help me if I’m saving for a mortgage?

There’s a range of government schemes that can help you buy your dream home. Look out for:

  • Help to buy equity loan scheme Available to first-time buyers and existing home owners who want to buy a new build costing £600,000 or less. You 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. You’ll need a mortgage to make up the rest.
  • 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, who is 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.
  • Starter home scheme This scheme has earmarked 200,000 new-build houses for first-time buyers, priced at 20% less than the market value. To qualify, you must be under 40 years old and the discounted price for these homes should be no more than £250,000 (£450,000 in London).

Start comparing

Realising how much you need to save to get on the property ladder can be daunting, but you’ll be surprised how little things can add up and make a big difference. So, start saving and start comparing mortgages today.

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