In October 2017 the average first time buyer spent £201,657 on a property, rising to £419,793 for those buying in London. With typical mortgages requiring a housing deposit of at least 10% (and good mortgage rates requiring around 20%), the dream of owning your own home can seem impossibly out of reach. But while it may require a level of planning, dedication and perseverance, this goal may be closer than you think . In this post I’ll explain the benefits of starting to save early and how long it will really take for you achieve your home ownership goal.
Overview
How Much Money Do I Need to Save For a Housing Deposit?
As a starting point it’s a good idea to have a look at what sum of money a bank would be willing to lend you based on your current salary. Inputting your annual earnings into this calculator will give you an indication. If the result seems low, don’t worry. You may get a pay rise in future that boosts your result, you may meet someone who you can split the cost with or you may decide to save a larger deposit.
Using your result you can work out what kinds of properties are within your budget and what deposit you’d require to secure them. In general you’ll need at least a 10% housing deposit on a property unless you buy through the government’s Help to Buy scheme (these require as little as 5%). However, it’s always best to aim for a higher deposit as this reduces both the amount you’ll need to pay in interest and the rate you’ll need to pay it at. Interest rates have been at historically low levels over the past few years but they could increase significantly over time. Typically an 80% loan-to-value ratio is a good benchmark to aim for – this means that you pay a 20% deposit and the bank provides you with an 80% mortgage.
For the purpose of this post I’ve shown how long it would take to save £15,000. That assumes a property price of £200,000 with two people collectively paying a 15% deposit of £30,000 (or £15,000 each). If you’re aiming to save more then simply multiply the number of years from the table by the multiple required. (e.g. If you’re aiming to save £30,000 by yourself then multiply the end result by 2.)
Number of Years Required to Save £15,000
The following breakdown shows how many years it would take you to reach £15,000 based on the percentage of your salary you choose to save each month. You’ll need to know your monthly take home pay (the amount paid into your bank account) and an estimate of your monthly outgoings. You may wish to check out this post first to build up an understanding of your typical saving rate.
Saving % = (Amount Saved/ Monthly Take Home Pay) x 100
For example if you have a monthly income of £1500 and spend £1200 each month, you are saving £300. (300/1500) x 100 = Saving rate of 20%. As per the table below it will take 4.2 years to save £15,000.
Number of Years Required to Save £15,000
Observations:
- Increasing the amount you save has a far bigger impact than getting a pay rise
- Small increases can make a big difference. Boost up your savings from 10% to 20% and you’ll halve the amount of time required.
How to Boost Your Housing Deposit
If you struggle to set any savings aside, then make this month the month you start. Start small and aim for 10%, then push for bigger savings as you achieve that goal. There will always be some people living paycheck to paycheck who truly have no other option, but for the vast majority of us it’s worth seeing if any cutbacks can be made to your lifestyle choices. The key is to find ways to save money that have minimal impact to your lifestyle.
When you’re aiming for that first 10% the small things can make big differences. A few suggestions you may wish to look at are below:
Quick Wins
- Find a cheaper phone contract
- Cancel a TV subscription you don’t use
- Eat fewer meals out
- Make your own morning coffee
- Take a packed lunch to work
- Increase your use of public transport
- Bulk-make meals
Big Money Savers
- Sell your car
- Move to a cheaper flat or houseshare
- Move back home with your parents
My biggest tip in terms of savings, is to set up a monthly standing order to your savings account. This should be paid before all of your non-essential expenses come out. Money saving apps (such as Chip) can also be helpful for those who find it difficult to set money aside.
Start saving 10% of your take-home pay from this month onwards and keep building until you achieve your home ownership dream!
Do you have any tips on saving for a housing deposit? Share them in the comments below!
