Getting Your Foot On The Property Ladder – A Guide To Mortgages For First-Time Buyers
Chapter Five
Story Highlights:
In this chapter we tackle the subject of deposits for mortgages with information about:
- Why we must pay a mortgage deposit
- How much of a home deposit you should have
- How to save for a mortgage deposit quickly and easily – prioritise your monthly expenses, change your living arrangements, increase your income
- Arranging to save regularly
- Saving deposit money – the best ways
- Banks or building society savings accounts
- Help to Buy ISAs – what they are, who’s eligible, their pros and cons
- Life-time ISAs – what they are, who’s eligible, their pros and cons
- Financial help from your family
- Borrowing and cash gifts from relatives and their pros and cons
- Family assistance from Family or Guarantor mortgages – how they work and their pros and cons
Saving for your mortgage deposit and hidden expenses
In order to take out a mortgage, you’ll have to start saving; not only for the deposit but also for the hidden expenses that come with purchasing a property such as conveyancing fees.
In this guide, we’ll be telling you all you need to know about deposits for your first home – why lenders require a deposit, how much you should set aside as well as tips to make it easier for you to save for the house of your dreams. In what ways can you economise? Finally, we’ll be looking at the different ways to save and who can help you add to your savings.
Why must we pay a mortgage deposit?
Mortgage lenders prefer you to make a contribution to the purchase of your home since it increases your equity (or share) of the property. In the days before the credit crunch, some providers would offer 100% or even 125% mortgages. But what would happen if the house prices fell and your property had to be repossessed? You would end up owing more than you borrowed and the lender would have little chance of recouping their losses.
From your point of view, the higher the deposit you can pay, the better. This is because the more money you put down, the greater your chances of finding an affordable mortgage with competitive interest rates.
How much of a home deposit should I have?
The amount you need to save for your home purchase depends on a number of factors. The first is the price of the property you’d like to buy and this varies according to its size and location. The second is how much deposit you’d like to pay. You should have at least 5% though 10% would be preferable. If you can, 20% would give you a greater variety of competitive mortgages to choose between.
Once you’ve done the maths, you have an idea of how much of a deposit you’re aiming for. When you first see the figure, it might seem daunting and you think that you could never manage to save that much. However, we have some handy advice to ensure that you can save easily and relatively quickly.
How to save for a mortgage deposit – Quickly and easily
Prioritise your monthly expenses
Before you start to work out how much you can save, it’s a good idea to work out your monthly outgoings. Start by making a list of the things you must pay (rent, utilities, phone, etc.) Then, make a list of your variables, which are the expenses that might change from month to month such as going out, clothes shopping, etc. Look long and hard at this list – is there anything that you could cut down on? For example, do you need to go out so often? Are you spending money unnecessarily?
If you think you can’t cut expenses and you’re in despair that you’ll never be able to afford a deposit, don’t worry. What you should do is to make a list of every single thing that you spend your salary on in a month, from newspapers or magazines to lunch with your colleagues. Once you do that, you’ll be amazed to see how much the little daily expenses can mount up over a month. It’ll give you ideas on how to cut back. For instance, take a packed lunch from home to work instead of eating out all week.
Reducing your outgoings has another bonus since it’ll help your mortgage application when the lender does an affordability check.
Summary:
Mortgage providers request a deposit since their loan to you will be less of a risk for them.
The higher the deposit you have on your mortgage, the greater the choice of competitive mortgages you’ll have access to.
The amount you need to save depends on the price of the property you’d like and whether you’ll put down a deposit of 5%, 10% or even higher.
Prioritising your monthly expenses can give you ideas on how to economise on unnecessary outgoings.
Changing your living arrangements
If you’re renting and also saving for a deposit, putting money by can be so much more difficult. Have you thought about changing your living arrangements? If you live in your home town, you could move in with your family. You might not want to go back home after living independently for years but it might be worth it in the long-run if it means you can save much faster.
Alternatively, you could think about downsizing by finding a room in a flat share. Again, it isn’t ideal but it’d work out much cheaper than renting alone. If you’d prefer not to live with strangers, do you have a friend or colleague who has a spare room they’d be prepared to let you rent?
You could think about downsizing by finding a room in a flat share. It isn’t ideal but it’d work out much cheaper than renting alone.
All of these solutions will have their challenges but bear in mind, every penny saved brings you one step closer to buying your dream home.
Increase your income
Another way to save faster is to increase your income. This could be by offering to do overtime at work, by doing a second part-time job or perhaps turning a hobby into a money-earner. There are a wealth of possibilities. The added advantage of working more is that it gives you less time, and to be honest less energy, for socialising so that you save pounds on the money you would have spent going out.
Arranging to save regularly
Once you have a figure of how much you need to save and have calculated how much that is a month, you can consider the best ways of saving. Before we give information about this, there are two things to bear in mind about saving in general.
First of all, don’t be over-ambitious. Set a reasonable monthly savings target allowing some money for possible unexpected outgoings in a typical month such as having to repair the car. Also, budget money to treat yourself every now and again; it’ll make you feel so much better if you don’t deprive yourself of everything you enjoy doing.
Secondly, make sure you arrange for the money for your deposit to be taken out of your account as soon as you get paid either by a standing order or direct debit. Treat it like a normal ‘bill’ or you end up putting by whatever is left in your account at the end of the month and it’ll never be enough.
Questions:
How much is the average deposit?
The average deposit for the first-time buyer, according to the ONS, has increased 10% since 1988 from 12% to 22% (2013).
How many first-time buyers are there?
According to Halifax, in 2016 there were 335,750 first-time buyers, which is the highest level since 2007. They also pointed out that the average deposit had doubled to £32,000 since then.
Are more or fewer young people purchasing property nowadays?
Compared to the 1990s, young people tend to be buying property at a later age and this is due to a number of factors including rising house prices and stricter rules for mortgage availability. Let’s take the example of people aged 25-34 years old. In 1991 67% were property owners but by 2012 this figure had dropped to 43%. (ONS statistics).
How many people live at home with their parents?
A February 2017 report by ONS found that the number of young adults living with their parents has increased from 2.7 million in 1996 to 3.3 million in 2015 (or 1 in 4 young people).
Saving deposit money – The best ways
There are a number of ways to put money by. We’ll be considering different savings account as well as the government-run Help To Buy ISAs. We’ll also be looking at the new Life-time ISAs (or LISAs).
Bank or building society savings accounts
You could use a bank or building society savings account for your deposit money, choosing between a regular savings account or an easy-access account.
A regular savings account requires you to put a set amount in every month and usually you aren’t allowed any withdrawals. This type of account offers the best interest rates but you often have to lock your money away for a set period. Some financial institutions stipulate that you must have a current account with them to open a regular savings account.
As its name suggests, an easy-access account is much more flexible allowing you to choose how much you deposit per month and letting you make a set number of withdrawals. However, the interest rate is lower and may drop further after an initial higher rate.
Summary:
One way to be able to save a home deposit faster is by changing your living arrangements: live with your family/friends or rent a flat share.
You could also try to earn money by doing overtime, working at a second part-time job or turning a hobby into a money-earner.
Be realistic about how much you can save every month, allow some cash for unexpected outgoings/treats and arrange for money to be transferred to a savings account every month.
There are 2 types of savings account: regular and easy-access.
Help to buy ISAs
What are Help to Buy ISAs?
Help to Buy ISAs (or Individual Savings Account) are offered by a variety of financial institutions but are a government initiative to help people to save for property. Whatever money you save will be topped up by a government bonus of 25% within certain limits.
Who’s eligible for help to buy ISAs?
To be eligible for this scheme, you must be over 16, be a UK resident, have a valid National Insurance number and be a first-time buyer. The property you buy must be your only home, be worth up to £250,000 (or £450,000 in London), mustn’t be rented out after you buy and must be purchased with a mortgage.
The scheme is due to run from December 2015 to November 2019 although you have until December 2030 to claim your bonus.
Pros and cons of help to buy ISAs
This is a great way to boost how much you’ve saved for a property and you have the flexibility to withdraw at any time. However, the major drawback of this scheme is that the money can’t be directly used for your deposit or extra fees for a home purchase such as the STLT (Stamp Duty Land Tax). Your bonus won’t be paid out until your property sale has reached completion but it’s been included in this chapter since the savings account you have will go towards the purchase of a house anyway, so why not take advantage of this bonus? Anything which increases the equity in the property will save you money on your mortgage in the long-term.
What are life-time ISAs?
Launched in April 2017, Life-time ISAs (or LISAs) are similar to ISAs but allow you to save much more and to deposit lump sums. Also, your bonus is earned annually instead of at the completion of your home purchase.
Who’s eligible for LISAs?
To be eligible for the LISA scheme, you must be aged between 18-39, be a UK citizen and never have owned property anywhere in the world. The property you buy must be worth up to £450,000, be your first or main residence and you aren’t allowed to rent it out after purchase.
Pros and cons of LISAs
Compared to ISAs, the main advantage of LISAs is that they permit you to use these savings for the deposit on your home although upon withdrawal, you have only 90 days to complete the purchase. Another benefit of LISAs is that it gives you the flexibility to deposit more money than the £200 a month limit set by ISAs and you can add lump sums. Also, LISAs are available for any property and not just new-builds.
Being a relatively new product, they aren’t as yet being offered by all financial institutions so you may be limited as to where you can open an account. Another drawback is that before you can take advantage of the cash bonus, your LISA account must have been opened at least 12 months so nobody will be able to take advantage of this scheme until April 2018 at the earliest.
Financial help from your family
Borrowing or cash gifts from relatives – pros and cons
Often young first-time buyers have help from what is sometimes called ‘The Bank of Mum and Dad’ although it could quite easily be another close family member. Sometimes parents (or grandparents) do this on an informal basis by giving or lending money to their young relatives. It’s perfectly understandable that they want to do this out of their love for you and their desire to see you settled but there are a number of problems with such informal arrangements.
First of all, mortgage lenders don’t like it. Rightly or wrongly, they believe that a loan from relatives isn’t really your money in the sense that it often comes with strings attached. There’s also a tax issue to bear in mind. Any cash gifts of over £3,000 can be liable to Inheritance Tax if the donor dies within 7 years of giving the money.
Another problem to consider is that when you borrow money from anyone, it can have an effect on your relationship with the donor. This is something you need to discuss. Is it a loan and if so, will interest be charged on it? How soon would they expect the money to be returned? Be realistic when it comes to promising how quickly you’ll be able to pay the money back. You’ll have mortgage repayments so how much will you be able to give every month?
Summary:
Government-run Help to Buy ISAs give you a bonus on your savings which can go towards your share of the house but not for the deposit.
The newly-launched LISAs permit you to save more and the bonus is awarded annually so they can be used for home deposits.
LISAs aren’t so widely available as ISAs and your account must be open at least 12 months.
There are a number of problems to address before making informal arrangements to borrow money from relatives or accepting gifts of cash.
Questions:
If I’m buying a house with a partner, do we share one bonus from ISA?
No. You’re each entitled to your own Help to Buy ISA bonus with separate accounts.
How much bonus can we get for our Help to Buy ISA account?
This depends on how much you save. The minimum bonus is £400 (so you must have saved at least £1,600) while the maximum bonus is £3,000 (on savings of £12,000 or over).
What happens to the bonus if the house purchase falls through or I change my mind?
If this happens, the bonus is returned to the government and your conveyancer will give you a ‘purchase failure notification’.
Can I use a LISA to stair-case my shared ownership property?
No. You aren’t eligible for this scheme since you already own property (even if it’s only a share).
How many young people have help from their parents to buy a house?
According to the Council of Mortgage Lenders, 8 out of 10 under 30s have financial assistance from their parents to buy their first home.
Family assistance through mortgage providers
If your parents (or grandparents) decide that they’d still like to help you purchase your first home but you agree it would be much better to put things on a formal footing, then there are a number of mortgages offered by lenders which allow them to do this.
The one that you choose would depend primarily on your family’s financial situation, whether you’ve saved a deposit and if so, how much you’ve saved. Your own personal circumstances and the standard mortgage affordability check for you as a borrower will be taken into account as well.
One way is for your relatives to put their savings into an account and the interest which would have been earned is offset against the loan making your mortgage repayments easier. Often the money is locked away until a large proportion of your mortgage has been paid off (as much as 80%).
Alternatively, your family member deposits savings into an account and this cash is held for a set period of time until you increase the equity in your property. Although interest is paid on the money, it isn’t as high as other savings accounts.
Another way is for your relative to either put 10%-20% of the purchase price in a savings account where it receives interest (though at a lower rate than usual) or their own property could be used as security.
Pros and cons of family and guarantor mortgages
The major benefit of family-assisted mortgages with a guarantor is that it perhaps allows you a greater chance of being awarded a mortgage and often reduces the size of the deposit you need to put down.
Family-assisted mortgages allow you a greater chance of being awarded a mortgage and often reduce the size of the deposit you need to put down.
However, your relative’s savings and/or property could be used if you default on your mortgage and/or there’s still a sum of money owed even after a repossession. If your relatives are using the provision they’ve made for their retirement or are using their main residence as security on your loan, there’s always an element of risk involved. It’s something that shouldn’t be hurried into – on either side – and talking to an FCA-approved independent adviser is absolutely vital before a decision is made.
Of course, you want to buy a home as soon as possible but what are the consequences if the unthinkable happened? Think about how it’d affect both parties – emotionally as well as financially.
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