Thinking of buying a new home can be exciting or scary depending on who you ask and for most people, the source of that emotion has to do with the home deposit. Maybe you have searched “How to save for a house deposit?“
You’re not alone if you are asking yourself how to save for a house deposit so you can get on the property ladder, especially in today’s economic climate bordering a cost of living crisis and inflation at the highest in recent history
Saving for a deposit is a key part of buying a house, and it doesn’t matter how bad the economy is, it’s not impossible to do.
A deposit isn’t the only requirement a mortgage lender requires before they give a loan.
When you apply for a loan, mortgage lenders look at many things and all lenders have their own unique requirements that must be met. Here are some things your lender might look at:
Your credit score influences both the approval of your application and the mortgage interest rate you will be offered.
Most lenders have a minimum credit score so it’s a good idea to have a good score because it increases your options and ensures you get a lower interest rate.
Don’t forget other information in your credit report, ensure it is up to date and correct
The lender needs to know if you can afford your mortgage and if you can make the monthly payments. The lender also uses your income to determine your max loan amount depending on the lender it can be 3x or 3.5x or 4x your gross income
Top tip: Stay on the same job for at least 6 months before applying
The lender will pay close attention to your debt-to-income ratio. The industry standard is a maximum mortgage payment of 28% of pre-tax income and a total monthly debt of 36% of income (including your new mortgage).
Assume your monthly income is £5,000 and your debts are:
In this situation, your total monthly debt payments would be £1,250. Divide this by your monthly salary of £5,000 to get a debt-to-income ratio of 27%. It’s wise to always reduce your debts starting with higher interest rate debts like credit card debt.
You may be required to provide bank statements so that the mortgage lender may verify things like your
Your mortgage lender will require proof of your deposit. I guess that’s why you are reading this post to learn how to save for a house deposit.
Before 2008 the real estate market was very active and banks often lent 100% or more of a property’s value, regardless of the applicant’s savings.
As a result of the 2008 recession, home prices fell by a lot, to the point where the loan amount was higher than the value.
Also, many people lost their jobs, so they couldn’t make their monthly mortgage payments, and sell their house.
To avoid this risk in the future, one of the things lenders started to ask for was a down payment and the bigger the better
Banks are more cautious regarding mortgages today. Most banks won’t finance a mortgage without a minimum 5% down payment.
Help to Buy Equity loan – The government lends homebuyers up to 20% (40% in London) of a newly built home’s cost. Customers pay a 5% deposit or more and get a mortgage to cover the balance. The first five years are interest-free.
The first step to knowing how to save for a house deposit is to find out
You can use an online mortgage affordability calculator to find out how much you can spend on a home.
Once you know how much your future home should cost, you can make a plan to save for a down payment and other costs
The next step is to make saving a priority, and the best way to demonstrate that is to save first and spend later.
Many people spend their income and try to save the leftover, a better way is to save first and spend what is leftover.
This is simple but a lot of people are not doing it and the easiest way to do this always is to set up automatic transfer.
This step helps you break down your personal finance, If you have been budgeting for some time this step will be a breeze. The main information you want to get from this is to know your income, your total expenses and the gap
This is important because it helps you determine
From these insights, you will know how much you can save for a house deposit monthly and also where you can reduce your spending.
If you have used the mortgage affordability calculator you now know the maximum property value you should aim for.
This number will help you know what type of home you can buy, which is required to know how much deposit you need.
Once you know the deposit, don’t forget to add in other costs such as conveyancing fees, property taxes and moving expenses and other closing costs.
This calculation will help you figure out how much money you need in your savings account to buy a home.
Try not to think of your savings goal as a big sum—this may discourage you! It’s better to divide that large sum into smaller monthly savings goals. You’ll be able to save thoughtfully without being overwhelmed.
If you’re a first time buyer, you can open a Lifetime ISA account and deposit up to £4,000 per year until you’re 50. You must make your first contribution to your ISA before the age of 40.
The government will match 25% of your savings up to a maximum of £1,000 each year.
You can take money out of your ISA if you are: Buying your first home, when you’re 60 or older and when you are terminally ill with less than a year to live. You will be charged a 25% withdrawal fee if you withdraw for any other reason
This is where we trip ourselves most of the time. You have good intentions but because there is no accountability you are not running on full cylinders.
An accountability partner is not there to force you to accomplish your goals, rather, they help to keep you on track. Remember that your goals are personal to you
Accountability partners can help you reach your goals in the following ways:
Yes, you’ve established how much to save each month and are determined to make saving a priority. The next step is to automate your determination and decision.
Set up a system that deposits your savings directly from your checking account to a savings account that offers high interest rate. That way, you’re not tempted to spend the money, and it can grow until you’re ready to use it.
Just keep in mind to arrange the automatic transfers on your payday; the same goes for paying your bills.
One of the last things you want to be concerned about when saving for a down payment is having to pay a late fee because you neglected to pay a utility bill.
There are many difficulties associated with the question how to save for a house deposit, this one action alleviates some of those difficulties.
Anything that makes saving for your home deposit easy will help you reach your financial objectives faster!
If you look back over last year’s bank statements, you’ll be amazed at how much money you spent and maybe some of them will serve you better if you save them for your house deposit.
You can easily find areas to save where you spent money on things that don’t make you happy or contribute to your wellness
The best way to keep your expenses under control is to keep track of them. When you know what you’re prone to squandering your money on, you’re more likely to resist making such purchases when tempted.
Any extra money outside our regular paycheck can be used to boost your savings account and bring you closer to your goals
Examples of sources to boost your savings to get extra cash
Remember that the purpose of rules of thumb is to guide you and possibly serve as a goal to reach and surpass. Here is a general rule to keep in mind as you prepare to buy a home.
The 32% Rule: I believe the 32% rule is a good rule of thumb, it states that all of your household bills, including your monthly mortgage payment, homeowner’s insurance, property tax, homeowners association fees, estate fees and any home ownership expense should not exceed 32% of your monthly income.
