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Saving for a mortgage deposit
According to the Office for National Statistics, in October 2020, the average cost of a house is £262,000 in England, £176,000 in Wales, £163,000 in Scotland and £143,000 in Northern Ireland. With a minimum deposit of 10% usually needed for a mortgage, saving can be daunting. But a bigger deposit can help you get the best possible mortgage deal. Read our guide to learn more.
What is a mortgage?
Many people can’t afford to buy their home outright. It’s far more common to get a mortgage, which is a long-term loan that you use to buy a property. Because of the high value, you need to put down a deposit, which counts as a percentage of the overall mortgage.
The property acts as security for the bank or lender if you can’t keep up the monthly payments and you default on your loan. The lender can then repossess the property and sell it to recoup their money.
With a mortgage, not only do you have to pay back the money you’ve borrowed, you also have to pay interest. This can be at a fixed or variable rate.
How big does my deposit need to be?
Your deposit is calculated as a percentage of the value of the property you’re buying. 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.
A 95% mortgage is the biggest mortgage you can get. Although it may still be possible to get a 5% mortgage, the number of these available on the market is likely to be very small.
Typically, the bigger your deposit, the better. A larger deposit means a smaller mortgage loan, less interest and access to better mortgage deals. In other words, you’ll get lower interest rates because 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 really attractive mortgage rates. Based on the average property price in England, a 20% deposit would cost around £49,600.
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 stump up in one go. But there are Government schemes available, to help you afford your dream of home ownership. Look out for:
Help to Buy - equity loan scheme
Available to first-time buyers and existing homeowners 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.
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.
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.
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 property value, after discount, should be no more than £250,000 (£450,000 in London).
Frequently asked questions
What if I have money in a Help to Buy ISA?
The Government’s Help to Buy ISA scheme gave first-time buyers the chance to boost their mortgage savings by 25%. The scheme closed on 30th November 2019. But if you opened and deposited money into a Help to Buy ISA before then, you have until 1st December 2030 to claim your Government bonus.
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.
You should 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. Typically though, 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 Compare the Market, 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.Start comparing
Why use Compare the Market?
**On average it can take less than one minute to complete a mortgage quote through Compare the Market, based on data in November 2020.
*** For the period 1st March to 31st May 2021, 9,781 people responded to the recommend question. 9,033 responded with a score of 6 or above, therefore 92.4% are likely to recommend
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’ll all be worth it when you’re the proud owner of your first home.”
Daniel Evans, from Compare the Market