So you’ve decided you might want to start seriously saving for your first home. It can feel overwhelming as it’s a long term lifestyle change. But don’t worry – we’ll start out easy.
This first guide will help you assess your spending, get some quick wins and forge some money saving habits that are so small you’ll barely even notice the difference in your lifestyle.
Once you’re comfortable with saving, and know what your goals are, you can move on to the second guide in the series: Sacrificing to Save
First things first...
How much do you need to save?
To know how much you need to save for a deposit, you’ll need to do a little research on the type of property you want.
- What area do you want to live in?
- A flat or a house?
- Leasehold or freehold?
- Do you need any extras, for example parking or a garden?
Start doing some research – what’s the average price of a property you’re looking for? Remember to be realistic, looking for properties that are workable
, rather than your ideal dream home.
How much is a deposit?
Many lenders will advise that 10% deposit is a good idea – some schemes and lenders will take 5%, but honestly, the bigger a deposit, the better off you are.
A larger deposit means a smaller mortgage, smaller payments and a better deal long term.
It also may be the only option if the price of the property is a lot higher than your annual income.
Why does my income matter?
Banks will not want to lend you more than 4.5 times your salary, as a general rule. This means that you’ll either need to pick a property that is within reach of your salary, or save a bigger deposit so that you’re borrowing less.
Other things to include in your saving amount:
Whilst it’s easy to just focus on the deposit, there will be other costs when you buy your home, like conveyancing costs
and other fees
You can use our Moving Cost Calculator
to work out what these might be. Add these costs to your total saving goal amount.
Where will you save?
It’s not just about you working to improve your savings – your savings need to work for you.
The type of account you put your deposit in can make a difference.
Two home-related options are the Help to Buy ISA and the Lifetime ISA
. Be aware that as of 30 November 2019, new applications for the Help to Buy ISA are no longer being accepted
. So if you already have one open it will continue to function as normal, but if you're looking to open an ISA it will need to be a Lifetime ISA.
Both accounts will give you a government bonus on your savings – but which one is right for you?
||Help to Buy ISA
||£200 per month
||£4000 per year
|Max property price
||£450,000 in London or £250,000 outside of London
||Can’t be accessed until after exchange so may not go towards deposit.
||Can only pay in up to the age of 50, must be under 40 to apply
||Good for smaller regular savings, can open the account with a £1200 lump sum in the first month.
||Can be used for first home or in retirement.
Making a budget
Now comes the fun stuff – you’ve worked out how much you need, where you’re going to put it and the nice little bonus you’re going to get on top.
So how do you assess your spending and saving habits?
Start with the easy wins:
Cancelling unnecessary spends
Have a good honest look at your accounts (yes, we know it’s painful). The first thing to do is look at those direct debits – the lapsed memberships you never take advantage of, the magazine subscriptions, streaming services you don’t use.
This isn’t about cutting down on the things you do use (yet) - but just about identifying anything that goes out of your account that shouldn’t be, just because you hadn’t really noticed it.
Dealing with debt
Up to 8.3 million people in the UK struggle with debt, so if you’re hoping to buy a home but need to get your finances in order first, you’re not alone.
A mortgage is one of the biggest debts you can take out, so mortgage lenders are not likely to want to lend you more money if you already owe a significant amount.
Clearing your debts should be the first order of business, whether that’s credit cards, loans or an overdraft. Luckily for many first time buyers, your student loan does not appear on your credit history and as a result will not automatically affect your chances of getting approved for a mortgage. However if you're making repayments towards your student loan, as with any outgoing this will be taken into account by the lender when they're deciding on your ability to make your mortgage repayments. This article from Which? on the impact of student debt on getting a mortgage
gives you a bit more information.
There are some great sources of information about clearing debt on Money Saving Expert
and the Money Advice Service
, but here are a few ideas to get you going:
- Transfer any existing credit cards to a 0% card so you can pay it off without incurring interest and fees.
- If you have a variety of different types of debt, collate them all together into a low interest loan.
- Alternatively, if you have a few smaller debts as well as a large one, pay off the smaller ones first. You feel like you’ve achieved more and they can be out of the way.
- Set up direct debit payments at more than the minimum payment. Make sure these come out as soon as you get paid. If you have anything left at the end of the month, add that amount to pay off your debt.
- Ensure you are not linked to people with bad credit (previous housemates, former partners etc).
- Ensure your address is up to date.
- Make sure you are listed on the electoral roll.
- Cancel any unused old accounts/credit cards etc.
There are various debt and money support services available to help you get on top of anything you owe. It’s also worth remembering that having savings when you have debt may be costing you. If you have £3,000 worth of credit card debt, but £3000 in savings, you’re paying interest. You’re losing out by keeping those savings. Whilst it can feel painful, paying off as much as you can will set you in better stead and save you more going forward.
Don’t become downhearted – taking control of your finances will mean you know exactly where your money is going and get you one step closer to home ownership.
Noticing trends and making a plan
Many people feel overwhelmed trying to make a budget – they either dismiss it as unnecessary, or go too far the other way by making rigid saving plans that have them living on a shoestring indefinitely.
Just like a fad diet, if you limit yourself too much you’re going to break. If you stop all spending, you’re eventually going to crack and go on a spending spree.
Instead, just look at your accounts. If you can, get a print out of your statements for the last few months.
Get out the highlighters and colours, and identify anything that is:
- A necessary payment (rent, bills, travel, food)
- A treat (meal out, lunch, coffees, cinema etc)
- Completely pointless
It’s likely as you look through your statement you’ll be left wondering what you bought at certain shops, or why all those small payments added up. What did you actually spend on? What brought you joy? What was frivolous?
Look for patterns and habits
– buying through boredom on your lunchbreak, or spending more on the weekend when you’re out and about? Out of these, what can you cut? Even just looking at this and knowing you spent £400 on restaurants last month can be an eye opener, making you think twice next time you head into town for a meal.
– make your first cut. One coffee a week instead of four? Half the number of meals out a month? Don’t go straight to zero, just make sure that anything you spend money on, you are actually enjoying and savouring.
Automating your habits
Automating payments works for you and takes off some of the pressure – so automating any payments to loans or credit cards (always at the highest amount you can afford, rather than the minimum payment) and payments to your saving account will help.
It supposedly takes 21 days to form a habit, so think about how you’ll change your attitude to saving and make a habit out of it.
It might be saying ‘no’ more often to nights out. It might be switching the Friday night takeaway to a homemade dish. It might be doing a food shop to make lunch for the week so you don’t have to buy it.
Anything you can do to automate your attitude and actions so they are geared more towards saving than spending, do it!
Getting a helping hand
Whilst the ease of contactless payments means we’re tapping our cards more often, technology also has a lot to offer the saver.
With friendly AI and apps offering to sort your money for you, there’s no end to the ways your mobile phone can help. Whether it’s Cleo sending you Facebook messages to highlight spending trends and make recommendations, or Plum and Moneybox rounding up your spare pennies into savings or investments, there’s help available.
Have a look at these articles on the top apps to help you save money for your deposit
and the social accounts to follow to get you saving
How much can you realistically save?
Be sure to leave yourself enough money at the end of the month to avoid going into your overdraft or facing fees and charges. If you’re not sure, start out with a small monthly payment and increase it month by month.
Or, work out how much you need to save and how many years until you want to buy your home, and decide your monthly payment that way. If it’s workable, go with it. If it seems a little steep, have a read through of our second guide
that will help you supercharge those savings and minimise your costs to reach that goal.
Thinking about your credit score
Whether your first step is dealing with debt, assessing your spending or choosing the right account to save your deposit in, you can’t forget about your credit score.
Your credit score is partly what mortgage lenders and banks will judge you on – it shows how good you’ve been at paying back money in the past and a high score will get you better deals. It shows you’re trustworthy and can be trusted with such a large sum to pay back.
You can find out your credit score in a number of ways, by using companies like Clearscore
or Check my File
Some quick ways to improve your credit score: If you don’t have any debts to pay off, you can build credit by being accepted for a credit card, putting a small amount on it every month and paying it off in full.
This is just the start of your saving journey, but by following these steps you can make a start towards owning your own home. Knowing how much you need to save, where you will save it and assessing your finances is the first step.
Let us know how you get on and share your own tips with #reallysaving
Look out for the second saving guide for when you’re ready to start Sacrificing to Save
Updated January 2020