What You Need to Know About Saving for Your First Mortgage

It’s many people’s dream to own their own home, but that first step up the property ladder can be difficult. House prices continue to rise, and saving for a mortgage deposit can be a major undertaking. That being said, the more you manage to save for your deposit, the better the mortgage deal you will be able to secure. So it is important to understand how best to go about saving for that initial deposit. If you are about to enter the housing market, here are a few things you need to know.

Housing Prices and Mortgage Deposits

Housing prices in the UK have hit a new high, with the average cost of a home hitting £272,000. This puts first time home buyers in a difficult financial position. The absolute minimum deposit for a UK mortgage is 5% of the total cost of the property. Assuming the average cost of a home, that works out to around £13,600. A fair amount for a first time home-owner. However, you are unlikely to find a suitable mortgage with only a 5% deposit. To secure the best rates, you really need to invest at least 10% to 20% on your deposit. Otherwise, you will struggle to find a competitive mortgage. So, before you even think about entering the market, you need to start saving for a sizeable mortgage deposit.

Saving for Your First Mortgage

Now that you have a better idea of what you are facing financially, we should talk about the best ways to save for your mortgage deposit. There are three basic methods to consider. These are tried and true savings schemes that are safe and produce results. Ideally, you might rely on a combination of the three to build up a sizeable deposit for your first mortgage.

1. Cash Isas – Putting your savings in a cash Isa allows you to earn interest while shielding your savings from the tax man. Now, interest rates on cash Isas may not be overly impressive, but when you consider the interest you accrue is tax free they often return better dividends than a standard savings account. Maximum limits on cash Isas currently stand at £15000.

2. Standard Savings Accounts – A standard interest bearing savings account is a good way to save for mortgage deposit. In some ways, it keeps the act of saving uppermost in your mind. However, you should be aware of any penalties for early withdrawals or missed deposits. You should also consider that you will have to pay tax on the interest accrued in a standard savings account. So even if you secure a better than average interest rate, it may be offset by your tax obligation.

3. Fixed Rate Savings Accounts – If you already have a sum of money set aside for your mortgage deposit, it may make good financial sense to put it into a fixed rate savings account. Now, this will put your savings out of reach for a year or two, and you won’t be able to access that money without incurring significant penalties, but it is a good way to earn a higher rate of interest on your savings. Again, consider your tax obligations when choosing a fixed rate savings account.

There are those who will suggest that you can make take money from investments to help build up your mortgage deposit. Of course, the choice is up to you. However, investment earnings are never guaranteed, and you run the risk of losing your investment all together. When building up your mortgage deposit, you want to rely on more secure money saving methods.

How Much of a Deposit Do You Need?

As we’ve said, the absolute minimum deposit is 5% of the total cost of the property. However, the larger your initial deposit, the more flexibility you will have when applying for a mortgage. With a more substantial deposit, you will be able to secure a more manageable mortgage plan. Consider your yearly earnings, and estimate how much you will be able to repay, per month, for your mortgage. Use our simple mortgage repayment calculator to help you estimate your deposit and potential repayment obligations.

Saving for your mortgage deposit can be challenging, but with the right knowledge and some careful planning you can build a sizeable deposit that will help you secure a satisfactory mortgage. The key is to start early, and allow yourself plenty of time to save. Consider all of the options for saving, and err on the side of caution. Over time, you will build up a mortgage deposit that will land you in the home you want, with a repayment schedule that you can easily manage.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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