The Best Ways to Save for a Deposit

Written by Karen Bryan

britishnotesIf you are thinking of buying your own home, then you should start saving for a deposit right now. Personally, I’d go for the biggest deposit I could save. This would mean that I’d pay a lot less in interest over the term of the mortgage.

At the same time, if house prices are rising fast, it could make more sense to buy sooner with a lower deposit, if your earnings will allow you to take out a large enough mortgage.

I know that a lot of people say that they can’t afford to save for a deposit, when they pay such a high proportion of their take home pay in rent. However, unless you get on the housing ladder soon, you are going to keep paying rent for the rest of your life. While it may mean some sacrifices now,  I reckon that it will pay dividends in the long term.

Have a look at properties in the area in which you wish to buy and decided how much you’ll need to spend to get the sort of property that you are after.  See what is the maximum that you can afford to borrow and comfortably meet the montly mortgagae repayments. This will enable you can set a target for your deposit savings.

If you already have some savings, you can use them to start bulding up your deposit fund. If you put these existing savings in a fixed rate savings account, that will guarantee the rate of interest earned plus make it harder to get access to your cash for any other purpose. AA Savings Accounts currently offer a two year fixed rate account paying 2.25%, which has a minimum opening deposit of £1. If you haven’t used your tax free Cash ISA allowance, the Britannia is paying 2.05% on it’s two year fixed rate Cash ISA. I’d be loathe to tie up my money for more than two years, in the hope that interest rates will finally start to increase.

Deduct any exising savings that you can use to kick start your deposit savings from the target. Then take a long hard look at your monthly budget and see how much you can set aside every month. Our tips on cutting your spending by 10% may help you to save more.

Divide the amount you need to save to hit your target by the amount you can save each month and that gives you a date on which you’ll reach your target. I’d then add on at least another £1,000 to cover legal fees and removal expenses.

Here’s a worked example. I decide that I will spend £100,000 on a property. The bank/building society will lend me up to £90,000. Therefore, I need a deposit of £10,000 plus another £1.000 for legal and removal charges. I have £3,000 in a savings account which I will use towards my deposit.  This means I need to save up another £8,000. I work out that I can save £250 a month, so it’ll take me 32 months to reach my target of £11,000.

You could make monthly payments into a regular savings account, which usually pays a higher rate of interest than an instant access account. The Norwich and Peterborough E-Regular Saver Account pays a fixed rate of 3% on monthly deposits of up to £250, as long as you make the twelve monthly payments and don’t make more than one withdrawal.

Finally, if you earn any bonuses, overtime, get a pay rise or have a windfall during the time it takes you to reach your deposit savings, put that cash straight into the deposit account to reach you target more quickly.