The path to property ownership or investment is long, especially when faced with the prospect of saving a hefty mortgage deposit.
For a myriad of prospective buyers in the UK, saving enough for a mortgage deposit represents more than a financial achievement, it’s a foundational step toward becoming a property owner. But with real estate and property prices still on an upward trajectory, high inflation AND rising interest rates. the urgency to piece together a substantial deposit cannot be overstated.
So, to get you started, we give you a few key pointers on how you can save more for your mortgage deposit.
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How much should you have saved before buying or investing into a property?
Before going into the commitment of homeownership, it’s imperative to have a comprehensive financial plan in place.
This plan should encompass not only the down payment/deposit but also additional outlays such as closing costs and moving expenses. Properly estimating these will provide a fuller picture of the capital required and avert any unexpected fiscal roadblocks.
Closing costs are the transactional expenses over and above the price of the property itself. These can typically range from 2% to 5% of the loan amount and encompass a suite of services mandated to finalize the real estate transaction. Within the UK context, these include but are not limited to:
- Valuation Fee: Charged by the lender for assessing the value of your chosen property to ensure it’s worth the loan amount.
- Legal Fees: Paid to a solicitor or licensed conveyor to handle all the legal work associated with buying a home.
- Stamp Duty Land Tax (SDLT): A tax on properties over a certain price threshold, distinctive to England and Northern Ireland, with separate systems for Scotland (Land and Buildings Transaction Tax) and Wales (Land Transaction Tax).
- Surveyor’s Fee: Covering the cost of inspecting the property to seek out any potential issues before you buy.
- Electronic Transfer Fee: For the secure movement of mortgage funds between parties involved.
When planning your savings, incorporating these closing costs is essential to avoid hasty, unplanned borrowing when the time comes to close on your house.
In totality, aiming to save around 20% of the home’s value for a deposit – as with an 80 LTV mortgage – plus an additional percentage to cover closing costs and moving expenses will provide a more accurate savings target.
This level of preparedness positions you for a robust start on your homeownership journey, free from the stress of last-minute financial scramble.
80 LTV Mortage – what is that?
The 80 LTV mortgage is popular particularly among UK buy-to-let investors.
LTV, or Loan-to-Value, refers to the ratio between the mortgage and the value of the property. An 80 LTV mortgage means the borrower takes out a loan for 80% of the property’s value, leaving them to cover the remaining 20% as a deposit.
The average buyer in the UK prefers a 20% deposit when buying a buy-to-let property and opts for 80 LTV mortgage which makes it more accessible but also can offer competitive interest rates while not overextending the borrower’s financial reach.
7 ways to save more money
Now let’s get to specific ways to save more for your down payment.
1- Build A Better Budget
To build the foundation of a robust saving plan, you must first get a clear picture of your net income. This is your take-home pay – the final amount you receive after all statutory deductions like taxes, insurance, etc.. Always base your budget on this figure rather than your gross income to ensure accuracy in your savings strategy.
Once you know what you earn, it’s time to tally up the outgoings. Document all recurring monthly costs, including already existing mortgage or rent payments, utility bills, council tax, subscription services, car payments and food expenses. This snapshot of your monthly outgoings will reveal the financial baseline you have to work with.
It’s likely that not all expenses are essential. So really drill down into your spending habits and carve away any non-essentials. For instance, if you’re subscribed to multiple streaming services, could you perhaps get by with just one? Small but strategic cuts can cumulatively result in substantial savings.
Making the move to a more modest apartment or less pricey locale can reap significant financial benefits.
If you could save even a couple of hundred pounds each month by switching, that could translate into thousands over a year – a strong boost to your deposit savings pot.
3- Skip the yearly vacation
Though it’s undoubtedly hard to forgo the annual retreat, the financial benefit can substantially bump up your savings. The cost of even a modest holiday could instead cover several months’ worth of mortgage savings, bringing you closer to your goal more quickly.
4- Consider switching jobs or ask for a raise
A more lucrative employment position or a well-deserved salary hike can drastically enhance your saving capabilities. For example, a £5,000 annual pay increase, if channelled straight into your deposit savings, can make a significant impact in a relatively short time frame.
5- Reduce eating out and cook more at home
By reducing the amount you dine out from, say, three times a week to once a week, and dedicating yourself to meal prep and home cooking, you can save a considerable sum. If eating out typically costs you £30 per meal and cooking at home is half that or less, the annual savings can be immense.
6- Pick up a tax beneficial side job
Embrace additional gigs that are tax-efficient. For example, you could invest in a Stocks & Shares ISA where returns are tax-free, or if you’re creatively inclined, sell your crafts or freelance services – just remember there’s a tax-free allowance for trading or property income in the UK.
Each little bit you can save without hefty tax deductions strengthens your position.
7- Get rid of your debt
High-interest debt, like credit card balances, can stifle your financial mobility. Prioritise clearing these debts. This could involve transferring balance to a 0% interest card or consolidating debts to reduce the interest rate. Once these debts are clear, you’ll have more monthly income to divert into your house fund.
By adhering to these principles, bolstering your savings to reach that all-important deposit is well within grasp. Authentically British in our approach, it’s about making smart choices that reflect both resourcefulness and prudence, hallmarks of the UK’s esteemed financial ethos.
To sum up:
- Establish and maintain a strict budget.
- Consider downsizing to save on monthly expenses.
- Temporarily forego vacations to boost your savings.
- Pursue career advancement or change for better income.
- Reduce dining out and increase cooking at home.
- Investigate tax-efficient side jobs and investments.
- Prioritize paying off high-interest debts.
Saving for a mortgage deposit may seem challenging, but it can be accomplished with the right strategies and a bit of sacrifice. By employing the seven methods outlined, potential homeowners can effectively build the necessary funds.
It all starts with a clear understanding of your finances and a commitment to your savings goal. With time, discipline, and dedication, you’ll build a solid foundation for your future home investment.