It’s ironic: the age of first-time buyers continues to rise, thanks to the ever-growing cost of buying a home. At the same time, renting also costs more than ever before – while just recently it was reported that it is now cheaper to buy a property than it is to rent one.
So all those people who are renting, and successfully keeping up with their bills every month, would probably be even better off if they bought.
So why do so many people fail to get on the property ladder these days?
The answer is the deposit.
At the time of writing the average UK property now costs £213,000. A tiny 5% deposit would come in at £10,650, while a more impressive 10% deposit would set you back £21,300.
And let’s be frank; with a 10% deposit you’ll not only find a far greater range of mortgages available, but the interest rates also tend to be more favourable – meaning even more reasonable monthly payments.
That’s all well and good, but there’s no denying that saving such a sizeable sum of money is challenging (to say the least).
As someone who is currently saving up my own deposit right now (and hoping to “pull the lever”) in August 2017, I’ve spoken to a lot of first time buyers and investigated an awful lot of ways to save a larger deposit in a shorter space of time.
Here are my tips…
Pay Yourself First
Lets start off with the obvious first step – rather than just wishing you could save up a deposit you need to make it your main priority in life. In other words you need to get serious. If that involves missing a holiday this summer then so be it.
The temptation in life is to spend normally each month, then aim to save whatever is left over. For obvious reasons this tactics tends not to work very well, as unless you’re earning an enormous wage most people are lucky to have anything left at the end of the month.
Instead you need to employ a classic personal finance trick known as “paying yourself first”.
Quite simply you decide on how much you want to save for your deposit each month, then you carefully put it away in a savings account. This money is then “off limits”.
Instead, you rely on whatever is left in your current account to see you through to pay day. Then you follow the same process again, consciously putting away a pre-agreed sum of money every time you get paid.
Will you have to budget and economize? Miss drinks out at the pub or take your own lunch to work? Maybe. But whatever it takes you don’t touch those savings – pay yourself first and live on what’s left over.
Help to Buy ISA
The government’s Help to Buy ISA is such a good deal that you’d have to be mad not to take advantage. I recently signed up for one and I’m more than a little annoyed that I didn’t do so sooner.
Here’s how it works…
You deposit money into your ISA, and the government applies a 25% bonus when you come to buy your first home.
In other words if you save £4,000 in your ISA, you’ll actually £5,000 (£4k + 25%) to use as a house deposit.
Now of course there are a number of rules. You can pay in £1,200 when you open your account, but then just £200 month thereafter. If you’re serious about saving for a deposit, therefore, you’ll probably want to have a second savings account to put even more money away in.
There are also limits on the cost of the house you can buy (at the time of writing the limit is £250,000) and how much you must have paid in before being eligible for the bonus scheme.
Despite all the rules around it, I think the Help to Buy ISA represents one of the best possible options for getting “free money” to help you save for a house deposit.
Consider this example.
You open your account with £1,200. You then save the maximum of £200 a month for the next 18 months.
At the end you’d have put £4,800 into your ISA. You’d also have been earning interest on this sum – something which is typically around 2%.
However the government will then top this up for you – and give you an additional 25%. In other words in this example you’d have an extra £1,200 for your house deposit – without doing anything differently.
Good stuff, eh?
The Lifetime ISA is due to come into effect from April 2017, and is available to anyone under 40 on that date.
In many ways it offers similar benefits to the Help to Buy ISA: you can save tax-free, earn interest and receive a 25% top-up on your deposit.
However there are some differences that you should be aware of.
Firstly, the annual limit is much more generous. You can pay in £4,000 a year – essentially giving you a bonus £1,000 a year. This is considerably larger than the Help to Buy ISA limit, so potentially means a larger deposit for you.
However there is a downside. The “bonus” you earn is paid annually. So if you open one in April 2017, and pay your £4,000 straight in, your bonus wouldn’t be applied until the same time in 2018.
So what’s better?
Well if you’re reading this right now I would suggest you sign up for the Help to Buy ISA. The sooner you start saving, the bigger you eventual bonus will be.
Then, when the Lifetime ISA comes out you can always transfer across if you desire.
Just bear in mind that if you do move across you’ll want to wait for a year or more before buying your first home.
Depending on when you want to buy, and how much you plan to save each month, that extra year could be a painful wait.
Here’s the painful one. Saving up for a house deposit is very rarey easy, but if its a core goal of yours then you might just need to make some serious budget cuts – at least in the short term.
Go through some recent bank statements and get a hold on exactly where your money is going. Then use this as a template for where to cut your expenses.
There are hundreds of ways you can reduce your monthly expenses, and so save more money for your new home.
Here are just a few ideas to get you started:
- Start taking lunch to work with you rather than buying premium sandwiches
- Stop eating out or visiting bars, and instead cook at home
- Investigate all your utilities to see if you could get a better deal elsewhere
- Walk instead of driving when possible to save on petrol
- Do your grocery shopping in discount retailers like Aldi or Lidl to save money on food
- Cancel that expensive summer holiday and put the money into your savings account
- Find free or cheap hobbies to entertain yourself
- Give up the cinema and watch movies at home instead
…as you can see, the sky really is the limit here.
While I’ll admit that economizing isn’t always fun, it is worth considering whether that expensive coffee on your way to work each morning is worth missing out on buying your dream home.
We’ve all got belongings that we don’t use any more. From old books to CDs to bikes. But all these unused belongings are worth money to the right people.
So downsize your possessions and sell what you don’t need for an instant injection of cash into your house deposit fund.
Take a Second Job
A great way to raise extra funds for a house deposit is to take on extra work. A second job, which you can do on the weekend or even during your evenings, can be a simple way to increase your income, and hence the money you’re able to save for your house.
Even simple jobs like working at a supermarket stacking shelves or sitting on the till can bring in a good few hundred pounds each month, considerably increasing your savings rate.
Bank of Mum & Dad
An increasing number of young people are relying on borrowing money from parents to get on the housing ladder. Even if this money counts as an early inheritance, many better-off parents, who own their house outright, are willing to at least contribute to your house deposit.
While they’re few and far between, some jobs provide the opportunity for free rent. To give just one example many vet nurses are offered free accommodation as part of their deal, and many expats overseas receive a generous housing allowance.
If you’re just at the beginning of your career why not look into such opportunities; imagine how much you could save if you didn’t have to pay any rent for the next year or two!
Move Back Home
Lastly, while it might cramp your style over the short term, an increasing number of graduates are opting to move back in with parents for a period of time. Here they pay discounted rent – or even none at all. They then use this period to furiously save what they would have spent on getting together a house deposit.
As you’re probably aware, saving for a house deposit is never easy. But if you’re serious about buying your first home then there are all sorts of ways to rapidly save up a deposit and make your dream a reality.