Friday 13th May 2022
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For most of us, buying a house means taking on the single largest, most long-lasting debt we’ll ever carry in our lives. Before diving into a decision like that, you’ve got to take a long, hard look at your money situation. After that, it’s all about making smart decisions that you can stick to, potentially over decades.
Still up for the challenge? Then it’s time to talk strategy. The biggest hurdle most people face when saving for a house is also probably the first one they run into: putting together a deposit. Let’s look at some of the best ways to get you to your saving goal in just 5 years.
Prep, prep, prep
Preparation is the key here. Ideally, once you’ve committed any cash to your “house fund”, you want it to stay saved. That means no dipping into it any time an unexpected, unrelated expense crops up, like a car breakdown or a redundancy. You can’t control or foresee everything that might happen in the next 5 years, but you can take steps early on to help protect your savings. For starters, set aside enough extra cash for one-off emergencies so they don’t get in the way of your real goals. This might mean you have to start your house saving a little slower or a little later, but you’ll be better protected overall and it’ll help you keep your eyes on the real prize.
Think around 5%-20%
So here’s where things get serious. When it comes to deposits, you’re probably going to be paying somewhere between 5% and 20% of your new home’s asking price up-front. As of 2021, the average value of a first-time buyer’s home was a little over £264,000. That means some people were being expected to front up well over £50,000 as a deposit. That’s at the upper end, obviously, but even a 5% deposit at that price comes to over £13,000.
The thing is, a smaller deposit might lower that initial hurdle quite a bit, but it makes the whole race track much steeper. The more you can afford to pay up-front, the lower your monthly mortgage payments will be. With a higher deposit, you’ll find yourself in a much stronger financial position for years to come.
Let’s slot a few numbers in here so you can see how it looks in practice. We’ll assume you’re putting down a deposit on a house worth £264,000. You decide to be fairly ambitious, and go for a mortgage deal with a 15% deposit. That means you’ll be paying about £40,000 up-front, which you’ve given yourself a target of 5 years to save. At that rate, you’ll be aiming to sock away about £660 per month consistently over those 5 years to hit your goal. Challenging, but not impossible, so let’s talk about how to make it happen...
Government Top Ups
If you qualify for one, a Lifetime ISA (LISA) is one of the best ways to save toward your deposit on a first home. You can only get one if you’re between the ages of 18 and 39, with a yearly pay-in limit of £4,000. Why are they so good? Well, how does an annual 25% cash boost to your pay-ins sound? That exactly what the government offers on these accounts - meaning that if you pay in the maximum of £4,000 in a year, you’ll get it topped up by an extra £1,000 for free.
Obviously, there’s a little more to it than that. For example, like other kinds of ISAs, you’ve got a choice about how your money is used. A stocks and shares LISA will invest your savings in businesses in hopes of faster growth, while a cash LISA will pay out an agreed rate of interest. Since you’ve got a specific goal in mind here, you might decide that a cash LISA is the less risky option.
You can read more about Lifetime ISAs in our other guide, “5 Alternatives to Savings Accounts”. One key point to understand now, though, is that you really have to commit to them to get the benefits. There are rules about how you access your cash that can completely wipe out most of the rewards of saving this way, with a 25% penalty to pay on any withdrawals you make before the age of 60 unless you’re using them to buy a house. That basically blows your whole bonus if you take it out early or use it for something else.
Remember the rule
The best way to keep control of your money is to make saving a habit. That means regularly putting away what you’ve decided you can afford, as soon as you’ve been paid for the month. We sometimes talk about the “50/30/20” rule, where you divide your income up into needs (50%), wants (30%) and savings (20%). It’s a simple system and it works. Every payday, you’ve already carved off the chunk of money you’ll be saving, and socked it away safely so it doesn’t get lumped in with your other spending.
Of course, to make the most of any saving strategy, you’ve got to work out exactly how much cash you’re reliably bringing in each month – and how much of it you’re spending. You can find a lot more information about how to do this in our guide, “4 Fixed Income Saving Strategies - Combine to Win!”, where we cover some top budgeting tricks that’ll put you back in charge of your finances.
Remember, missing your savings target for any given month doesn’t derail your whole plan. We all face unexpected setbacks, and some months just cost you more to get through than others. If you can manage it, a simple way to catch up is to spread out the amount you missed your goal by over the next few months. You’ll be back on track in no time, and will probably barely notice the difference month by month.
Sharing is caring
Sometimes, the most obvious solution to a problem is still the best one. If it’s looking like you can’t afford to seal the deal on a new home purely out of your own pocket, why not go in with a partner, mate or relative? It’s simple maths; all things being equal, just one more person helping to put together your deposit will cut the time it takes to save it in half. If you’re not too bothered about the amount of time it takes to get your deposit sorted, you can simply bring down your monthly savings target a bit to give your month-to-month finances a bit of a breather. It works either way.
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Squeaky clean
When you’re buying property, it’s not just your own money you’re risking. You’ve got to keep in mind that your mortgage lender will need to think of you as a safe bet. A clean credit history’s a great step in the right direction – and paying down your debts before you start saving seriously will actually make the road ahead a lot less rocky.
Speaking of keeping an eye on the future, don’t forget the extra costs you’ll be facing beyond your basic deposit and mortgage repayments. Solicitor fees, Stamp Duty and moving costs can all lump a lot of extra money onto your overall costs. Be sure to factor these into your budget so you don’t get tripped up later.
Keep checking back here for more money tips and updates. We’re experts at saving you cash and we’re always here to help. That’s the reason why you’re better off with RIFT.
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