One of the biggest challenges to getting on the property ladder for the first time is getting a deposit together. Rising house prices have meant that the deposit required is often tens of thousands of pounds – which can seem impossible unless you are earning a fortune, or are lucky enough to have family prepared to gift you most or all of the deposit.
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 limited. If you want to be eligible for a wider choice and lower rates you’ll need a 10% deposit, while even lower mortgage interest rates only start kicking in at around a 25% deposit.
However, it’s never too early to start saving.
The key to building up a deposit is to start saving as much as you can as soon as you can. You will also need to remember there will be other costs. As well as your deposit, you will need to save up for stamp duty, moving costs and legal fees. You can read more about this in our first time buyer guide.
So how much will you need to save?
The average house price in the UK is around £215,847 according to official data published by HM Land Registry in May 2017. To buy a property worth that sum, you’d need to save at least £10,800 which would give you the minimum 5% deposit required by some lenders.
Putting down 10%, which would give you access to cheaper deals, would require you to save £21,584 while a 25% deposit would mean getting together a whopping £53,961. And if you are looking to buy in London these percentages will be higher due to the higher property values.
Don’t panic! 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 have affordable home ownerships schemes, including Shared Ownership and First Homes, which you can read more about on the government’s website.
Where to keep your savings
So where should you put your deposit cash? The best home for it will depend on exactly when you are planning to get on the property ladder.
Short-term savings
Regular savings accounts: 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.
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 most likely be lower than regular savings accounts.
Ensure you are aware of the account’s terms and conditions as some easy access accounts have withdrawal restrictions too, some only permit a handful of withdrawals each year.
Medium to longer-term savings
Most first-timer 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 annually.
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 for your deposit.
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 may 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 until the fixed rate period ends.
With savings rates being low at present, it’s never been more important to do your research 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.
View our savings accounts here.