How To Save for A House Deposit (Plus All The IMPORTANT Things To Know!)

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:

  1. How to work out how much you need.

  2. How to maximise your savings.

  3. Where to save.

  4. What mortgage lenders want to know.

  5. 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.)

house deposit for cribs

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!

yolt app 

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.

grow money for house deposit

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!

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‘Do I Need a Pension Plan?’ Starting a Pension in Your 20’s

Should You Have A Pension in Your 20’s?

Today’s post is going to focus on pensions and specifically, whether you should invest into one or not. I’ve said in your 20’s, but really at any age. The idea of paying into a pension of course is to build up money in order to provide you with a comfortable retirement. But what are the main advantages to you? Are there better ways to save or invest for retirement?

Firstly, Who Am I?

chris bourne financial planner with retirement

So if you are new here, don’t know me and haven’t yet read any of my posts: I am a financial planner and have been for 16 years. If someone was to ask me what my main area of expertise was and I had to choose one, I’d say it was pensions. I’ve spent a good portion of every working day for the last 16 years discussing and advising upon different areas of pension planning. A lot of my professional qualifications are in that field too. So although I’m only passing on my opinion here, hopefully you can see that it is at least a qualified opinion.

Now having said all of that, I’m not some sort of pension evangelist who thinks they’re the only way to fund for your future lifestyle either. I think they’re part of the overall puzzle, but quite an important part. I’ll explain just why that is and why funding one as early as possible could be of huge value. Most of my knowledge is based on the UK financial and taxation system, but most of what I say will apply wherever you are in the world.

I’d love to know as well if you’ve got a pension at the moment or any type of specific retirement vehicle in addition to a workplace pension… What do you think of pensions?

Areas to look at:

  • Busting some pension myths
  • Tax advantages (how these incentives can accelerate your returns)
  • Access (when can you get your money)
  • Bonus (special bonus feature of pensions)

Pension Myth Busting

There are a lot of myths and pieces of misinformation when it comes down to pensions. Most have been passed on from person to person and based on poor understanding or negative experience.

A lot of the time that negative experience is due to lack of proper guidance in the first place, which could have been avoided.

  1. My pension has lost me money

Pensions are not primarily responsible for the return you receive. A pension is not an investment in its own right – it is a ‘tax wrapper’. It’s the same with an ISA in the UK or a Roth IRA in the US. They are just empty boxes that you can put different investments into. It’s those investments that determine the return you receive.

Sometimes people say that they’ve lost money in pensions; they haven’t. The pension hasn’t lost anything. The investments they hold in there may have gone down in value, but the pension itself hasn’t lost anything.

In a pension you can hold shares, index funds, exchange traded funds, all of the same things you can hold in a brokerage account – those things go up and down in value. The pension is just a tax shelter, which can be used to improve your results.

 

  1. My house value has gone up more than my pension has. Therefore, direct property investment is always better.

Firstly, I like real estate as an investment. It carries some serious advantages that I discussed a little while back in my property leverage video. But that statement is misguided and is often used to put people off investing in pensions. Property prices have not increased as much as the US stock market has over the last 30 years… That’s a fact.

What people are doing is making an unfair comparison. They might be comparing a house purchase for 60,000 in 1990, and now the house is worth 350,000.

For starters though they probably didn’t buy it outright, they probably used a mortgage. So the actual cost of the purchase with all of the interest added over 25 years would have been higher.

They then forget about all of the bills they’ve had to pay to remain in that house. Then the redecorations and extensions that have been added to keep it looking nice and maintaining its value.

I can categorically promise you that if you’d started with an initial pension investment of 60,000 in 1990, put it into a global index tracker fund and paid in the same amount as you’d spent on your house, it would be worth more than 350,000 now.

That isn’t to say property investment isn’t a good idea because it absolutely is. It offers huge potential. I’m just saying that to illustrate that, most of the time a direct comparison can’t be made between someone’s own house value and their pension. Their pension would usually not have been given anywhere near the same level of funding.

property investment or pension

Tax advantages

So this is where a pension really comes into its own. Tax relief on pensions is what can make your investments grow faster. In most parts of the developed world there are tax incentives for saving into retirement vehicles like pensions. These will ensure that you pay less tax and therefore keep more of your money. Money that can then be reinvested so you can retire earlier, or just have a more comfortable retirement.

There are different ways pension tax incentives work in the UK, but if you are paying into a personal pension, whatever you pay in will have 25% added to it upfront.

That’s because it’s assumed that you’re paying in money that you’ve earned, which has been taxed, so that tax is awarded back to you by being added to your contributions.

If you pay higher rates of tax, at either 40% or 45%, you receive relief against this too because your pension contributions are added on top of your basic rate tax band when your tax is being worked out. This means more of your earnings are taxed at a lower rate and you actually take home more.

That’s why if you’re a higher rate taxpayer and you make private pension contributions, you should always complete a tax return in order to receive that benefit.

There are limits to what you can pay in each year to pensions based on your earnings and that is pretty much the case the world over. Check out what those limits and allowances are because it is usually certain to benefit you.

The younger you start, the more chance you get to benefit from this with the power of compound interest, which is the phenomenon of getting growth on your growth.

Accessibility

Pensions are designed for retirement security, which means that there are usually locks on how soon you can actually access your benefits and start taking an income.

In the UK it’s currently age 55 and that is planned to increase to 57 in 2028. Other countries are generally broadly similar with slight differences, so check out the rules wherever you are.

This is good in the sense that if you’re young, your money will have loads of time to grow and provide a healthy income for you in the future. HOWEVER, if you’re going full steam ahead and you want to retire in your 30’s or 40’s; a pension isn’t going to be all that helpful to you.

I wouldn’t forsake them completely because it’s still good to have a supplementary income kick in later down the line, but your focus would have to be more on building other types of investments. That would be things like share portfolios in brokerage accounts and direct property portfolios.

You should always look to use other tax effective vehicles that aren’t age locked, such as ISAs in the UK.

For people who don’t want to live on their investments until mid 50’s onwards however, pensions are a good option and there are usually a number of choices for how you can take your pension income.

In the UK these days, it is totally flexible, almost just like drawing from a bank account. So it’s not too late to start funding a pension now.

Bonus Pension Tip

One major bonus of pensions in the UK is that certain types of them, called Self Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs), allow you to hold direct property investments.

You can even borrow against the value of your existing pension fund in order to purchase a property currently worth more than your pension is.

A SIPP allows you to borrow 50% of the existing pension assets. So in theory, if your pension fund was worth £200,000, you could borrow half of that to purchase a property worth up to £300,000. In practice you’d need to hold some of the £200,000 back for legal and other fees and to pay for borrowing costs, but that is the theoretical principle.

The property you can buy though can only be commercial property, not residential property like houses.

You can buy shops, offices, factories, warehouses and those types of things. The major advantage of doing this is that rent will be paid into your pension. You can often get attractive rental yields from the businesses that occupy your property. That rent can then itself be invested and grow free of tax. If you were to sell the property in future, the gains would also be completely sheltered from tax.

It’s very popular as a way of business owners buying their own commercial properties in a tax efficient way, but it can be done by anybody; you don’t have to be a business owner.

So Pensions… Is it worth it?

So when somebody asks me should I really bother taking out a pension when I’m young, the answer I’d give is generally YES. I would say though that if you are very serious about wanting a really early retirement, you have to remember about the accessibility aspect.

If you would like to see videos on how to invest tax free and other related wealth building topics CLICK HERE TO GO TO MY YOUTUBE CHANNEL!

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