Building up a deposit is one of the biggest hurdles of getting on the property ladder. Rising house prices have meant that those looking to buy their first home often need to put down tens of thousands of pounds as a deposit – which can seem impossible unless you’re earning a fortune, or are lucky enough to have family prepared to stump up the cash on your behalf.
A sum of 5% of the property value is the absolute minimum you will need to put down and, even then, your choice of lenders and deals will be restricted. If you want to be eligible for a wider choice you’ll need a 10% deposit, while the really competitive rates only start kicking in at around a 25% deposit.
It’s never too early to start saving
The key to building up a deposit is, quite simply, to start saving as much as you can as soon as you can. Post credit-crunch, banks and building societies are much more cautious about who they lend to, so the bigger the deposit you can stump up, the lower the risk you will be considered – giving you access to a wider – and cheaper – raft of mortgage deals.
The key to building up a deposit is, quite simply, to start saving as much as you can as soon as you can.
But don’t forget about other costs. As well as your deposit, you’ll also need to save up for stamp duty, moving costs and legal fees. You can read more about this in, The costs of buying your first home.
How much of a deposit do you need to save?
The average house price in the UK is around £170,000, according to official data published in the summer of 2013. To buy a property worth that sum, you’d need to save at least £8,500 which would give you the minimum 5% required by lenders.
Putting down 10%, which would give you access to cheaper deals, would require you to save £17,000, while a 25% deposit would mean getting together a whopping £42,500. And if you’re buying in London these percentages will be a lot more as house prices are higher still.
Don’t panic though as, wherever you are buying, if you can only get your hands on the minimum 5%, there are schemes and deals to help you. The government is offering its Help to Buy scheme which you can read more about in, Help to Buy explained. Some lenders also offer special mortgage deals to those struggling to get on the first rung of the property ladder. You can read about these in Mortgages for first-time buyers.
Where to save
So where should you stash your deposit cash? The best home for it will depend on exactly when you are planning to get on the property ladder.
Regular savings accounts: For example, if you are saving over a short period of time, say a year, you might want to think about a regular savings account. These generally require you to pay in between two set amounts (say, £25 and £300) each month typically for a 12-month term – during which time you usually won’t be able to make withdrawals.
Regular savings accounts tend to offer the best rates of interest as you are agreeing to lock in your cash. On the flipside though, you will often need to have a current account with the provider before you can apply. You can compare regular savings accounts here.
Easy access accounts: If you’ve got less than a year to save, you’ll need to go for an easy access account. These are the most flexible accounts as they allow you to get your hands on your cash – and add to it – whenever you need to. However, because of this fact, the rate of interest you earn will be pretty low. Currently even the best deals pay less than 2.00% AER.
Watch out for withdrawal restrictions too, as some of the best-paying ‘easy access accounts’ actually only permit a handful of withdrawals each year. You should also be aware that many easy access accounts come with bonus rates which expire after a year or so. At that point, you’ll have to move your cash or suffer a plummet in returns. You can compare easy access savings accounts here.
Medium to longer-term savings
Most first time buyers wanting to get onto the property ladder will need to save for several years in order to build up the deposit they need and will need to find a savings account to suit.
Cash ISAs: A great place to start is with a cash Individual Savings Account (ISA), as the interest you receive will be free from income tax. Because of this fact however, the accounts come with a cap on how much you can pay in. In the 2013/14 tax year – which runs from April to April – the maximum is £5,760.
You can choose from a variable rate ISA, where the rate can go up and down, or a fixed rate ISA, where you know that the interest you are paid won’t change over time. However, with fixed rate ISAs you usually have to pay in a lump sum at the outset which you can’t then add to, and you can’t usually make withdrawals. This means that fixed rate ISAs may be a better option if you’ve already managed to build up a good start of your deposit. You can compare cash ISAs here.
Fixed rate bonds: If you have used up your full cash ISA allowance and are looking to save in the long term, you may want to consider a fixed rate bond as the interest you earn will be better than on an easy access account. However, you will need to invest a set amount at the offset, £1,000 for example, which you typically won’t be allowed to add to or withdraw from. And with interest rates so low, locking your cash in for any longer than a year or two, could prove a mistake. You can compare fixed rate bonds here.
Current accounts: It sounds odd but, these days some current accounts pay more than even then best savings accounts – and are totally flexible when it comes to getting access to your cash. The downside is, the higher rate of interest will only apply to a set limit – for example the first £20,000. You can compare current accounts here.
With savings rates notoriously low, it’s never been more important to shop around for the accounts that will squeeze the most from your cash – especially as it takes so long to earn it!
You should also make sure you regularly review your savings accounts and move your money if better rates become available elsewhere.