How to Save for a House and The Important Things You Need to Know
Today’s post focuses on something that a lot of people want to know about; particularly younger people, because it’s a very important part of life. That of course, is buying a house! But what is the best way of building a house deposit quickly?
Most people agree that it’s wise to get on the housing ladder, in some way, shape or form, as soon as you can. This blog will help you get that extra knowledge for getting your house deposit as fast as possible.
I’m going to give you my general tips for how to build a house deposit in the quickest way possible. Even if you’re on a low income at the moment. I also want to cover some other really important things to be aware of too because saving up a deposit is only part of the picture.
My tips are based not only on my experience as a financial planner, but also on the fact that I spent the first five years of my working life in the banking sector in the branches.
These things will allow you to plan forward and give you the best chance of getting a mortgage.
Things I’m going to cover are:
How to work out how much you need.
How to maximise your savings.
Where to save.
What mortgage lenders want to know.
Bonus Tip: Saving for Investment Properties (this has a slightly different dynamic).
Most of these tips will be relevant wherever you are in the world, but some bits may just apply to UK.
How Much You’ll Need
The best place to start is to think about what sort of property you’d like to purchase. Be realistic. If you’re starting from scratch, you won’t be able to buy a mansion from cribs. (We can all dream.)
Think about your needs. Which area, how many rooms, what type of property. Get a feel for the general prices of what you’re looking for. Take an average and then your aim should be to save at least 10% of that amount as a house deposit.
Most mortgage lenders won’t be interested unless you’ve got at least that to put down. So if you’re looking at properties worth 200,000, you’ll need 20,000 saved.
Bear in mind that property prices will generally go up though, so you should set your target a bit higher. The remaining £180,000 is what you’ll need to borrow as a mortgage.
So then it’s worth getting an idea at this stage what a mortgage lender would be happy to lend to you based on your income and whether you would be able to borrow what you need. There’s a quick affordability calculator on the Nationwide website which will allow you to do this.
Don’t worry if you’re short at this stage, I’ll come onto that in a bit. At least you can now work out what you may need.
How to Maximise Savings for Your House Deposit
Straight off the bat you need to know that building up money from scratch, if you haven’t got a particularly high income, isn’t easy. It will take discipline and sacrifice.
For example. If you want to save 20,000 in the space of two years, that means finding just over 800 a month to put away.
Starting off with the simple things first. You need to do a review of your spending and identify areas that you can cut down.
There are some brilliant apps like Yolt and Emma to help which analyse your spending and identify wastage on subscriptions you don’t need. Other apps like Plum and Tandem use algorithms to actually work out how much you can physically save.
Most of these offer round up facilities, so your spending is rounded up the nearest pound and the pennies are saved for you. They offer cash back on purchases with different retailers which is saved for you as well. All vital things to ensure you are squeezing the most out of your income and your spending, done for you!
Cash back is something you should try and maximise. I gave some tips for how to do this in my Top 10 Financial Planning Tips blog recently. Click here to check that out.
Need To Earn More for Your House Deposit?
Let’s say you’ve used these apps to analyse everything though. You’ve cut down money spent on too many meals out and too many take away coffees. You’re still short on your monthly saving target. It’s pretty obvious what you have to do…
You have to earn more money! This is an unescapable fact.
If what you’re getting currently won’t allow you to save what you want to get the house and life you want, you need more of it.
This could be either through progression in your current job or it could be through additional casual work or a side hustle, or both. You need to work out what is best for you and how much you want to put away a month.
If you feel there’s room to improve your performance and progress in your current job and you enjoy what you do, go for it! Be open with your employers and explain that you’re looking to progress. Ask what will be expected of you in order to earn more and what the timescales are likely to be. Try to get some finite parameters, then go beyond what’s expected.
Going down the supplementary income route is good to get some extra money. If the goal is purely for the specific purpose of building a deposit, some casual evening/weekend work might be best. Especially if you don’t want it to take up too much brain power.
Perhaps though you are the entrepreneurial type and you want to build something that could provide a bit more potential? If so that maybe look at learning some new skills or developing some existing ones to start a side hustle. Who knows what that could turn into!
Sites like SkillShare offer loads of courses on essential skills like digital marketing, blog writing, content creation, affiliate marketing and tons of other things.
Click this link to get a free 14-day trial and a big 30% discount off an annual SS membership. (There’s some affiliate marketing right there!) Remember though, that side hustles are work. they can be HUGELY rewarding, but they will require a fair amount of time too.
Where to Save Your House Deposit
Generally speaking, if you’re saving with the intention of accessing the money in the short term (anything less than five years), you need to save into a savings account where the value doesn’t fluctuate.
You shouldn’t invest into anything where the value can fall if you need it in the short term or at short notice… those things are for longer term investing.
You won’t get a fantastic return on your money, but try and get the best you can. Look out for accounts with introductory offers like sign up bonuses and high interest rates on limited balances.
Beyond that perhaps look at notice accounts, which offer slightly higher interest rates. Move your money around to get the most interest possible.
There may be dedicated savings schemes in whichever country you’re in that give special rewards and help people trying to get on the housing ladder.
In the UK we have what is called the LISA (Lifetime ISA). That should be your first port of call for your house deposit if you’re UK based.
You can save up to £4,000 a year into a Lifetime ISA and at the end of every year, a special bonus of 25% of what you’ve saved is added by the government. So, if you’ve paid in £4,000, a £1,000 bonus is added for you tax free. As you can imagine, this is really helpful and gives you a good boost.
You can only start a LISA between the ages of 18 and 39 and you only qualify to keep the bonuses when withdrawing for one of two purposes:
- Buying your first home
- Or retirement after the age of 60
Withdrawing for any other purpose results in a penalty, which effectively takes the bonuses away.
As well as the bonuses you also receive interest on what you save so shop around for the best LISA deals. Moneybox has the best one at the time of me writing this. It pays 1.1% interest in the first year, reducing to 0.5% after that.
What Mortgage Lenders Want to Know
So you’ve managed to pull together your deposit and now you want to buy, but you need to get a mortgage.
I’ve assumed so far that you haven’t got lots of consumer credit and left-over credit card balances. If you have, you want to focus on clearing that first. Any debt you’ve got will reduce what any mortgage company is willing to lend you.
You will of course need to prove your income, which is actually easier if you are employed. Traditionally a lender will want to see 3 months of payslips to check that your income is reliable and robust.
If you’re self-employed though, mainstream lenders will want to see at least two years of trading accounts. They also want to make an assessment of whether you’re a good risk, and they do that by looking at your credit file.
That’s why it’s important that you’ve got one, so try to ensure you start building up a credit file from as young as possible (18), by taking out a credit card and managing it effectively. (you can check out my recent video here for tips on that)
They’ll want 3-6 months bank statements as well to check your spending patterns, making sure you’re not going overdrawn and spending more than what’s coming in every month. It is important that you’re tuned into that.
Just keep in mind what you’d want somebody’s finances to look like if you were thinking about lending money to them. If you do that, you won’t go too far wrong.
Bonus Tip: Buying Investment Properties
Like I said at the start, buying investment properties carries slightly different considerations.
In terms of becoming a property investor at a young age or as quickly as possible, I believe you could approach the building of a deposit in a slightly different way…
If were looking to purchase an investment property with a mortgage (a different type of mortgage called a Buy to Let mortgage), you would need a higher deposit of at least 25%, which would take longer to save up. Just building up that sort of money in a deposit environment with really low interest rates would mean missing out on growth on your money.
So, I would actually invest regularly into stock market-based funds first like index funds and ETFs. They must be in an accessible but tax efficient environment.
In the UK we have the ISA… other countries will have their own variants. Essentially what an ISA does is protect the gains you make from any tax, which is super important.
The reason I’d do this is:
Buying an investment property probably isn’t as time dependent as buying your own house. Most people want their own space and freedom as soon as possible because it’s a basic human need, whereas an investment property is bought purely to make money.
By investing into the stock market to build the investment house deposit first though, you’re still giving your money the chance to grow. It would certainly give you the chance to reach a deposit goal quicker. If investment values do fall back a bit, it doesn’t matter. Nothing is time constrained and they can be left to bounce back. You could though at any point in the future exchange the money you’ve accrued, or a portion of it, as a down payment on an investment property if the right opportunity arises. Doing this will give you access to the power of leveraged returns to potentially accelerate your wealth much faster.
BTL mortgages work differently to standard mortgages in that they work based on rental coverage. This is the percentage of the mortgage that could be covered by the rental yield of the property.
But this post is just to give you a flavour! There are many other blogs and YouTube videos that would cover that subject off in more detail. If you would like to watch the video relating to this topic, Head over to my YouTube Channel.
Let me know over on my Instagram what kinds of videos you would like to see from me so I can give you my best qualified tips!