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Saving for your mortgage deposit

For almost 10 years before the pricing peak in July 2022, the UK had experienced uninterrupted growth in house prices due to high demand and a huge lack of supply. 

Homebuyers purchasing properties at the peak of the housing boom in the summer of 2022 paid 14 per cent more than they would have done only a year before.

Since then, house prices have started to come down and one big reason for this is the higher mortgage rates. 

2022 saw the most dramatic rise in mortgage rates in recent history. One stark example is that the 10-year fixed mortgage rate doubled in one year.

Coming up with a deposit can be challenging

Higher house prices, coupled with higher mortgage rates, can give homeowners a massive stretch when it comes to finding the deposit they need to secure a mortgage.

A man's hands counting stacks of coins as he saves for a mortgage

In April 2023, the average sale price for a home in the UK was roughly £286,500. This average covered all types of property, from flats through to detached houses. 

PIL Southampton is a leading mortgage broker serving clients in the Southampton area. In this region, the average house price is higher than the national average, with the overall average property price being £304,221 during 2022. Flats made up the majority of property sales in Southampton over the last year, selling for an average of £117,549. Terraced properties sold for an average of £282,121 and semi-detached properties for £331,289.

Overall, the prices that properties sold for in Southampton over the past year were up 6% on the previous year, and 11% up on 2020.

You can click here to find out the average house prices in every area of the country.

In most cases, the deposit is the most crucial element of getting a mortgage.

100% mortgages are not common in the UK – since the 2008 global financial crisis UK banks have tightened lending criteria more and more, and lending someone 100% of the value of their property is generally considered too risky. The 100% mortgages that are available are generally a guarantor mortgage or a family-deposit mortgage, which may not be a viable option for many.

So, providing a deposit is usually very, very important. 

How much deposit do I need to come up with?

Ideally, lenders prefer borrowers to come up with a 20% deposit, but it doesn’t take a mathematician to work out what a challenge coming up with that kind of sum can be for many individuals – £60,000 to secure a £300,000 property, for example.

More commonly, the minimum deposit for a mortgage is 5% of the property’s value so, to use the same example, a deposit of £15,000 would be needed to secure a mortgage on a property valued at £300,000.

10% is preferable, which would mean coming up with a £30,000 deposit to secure a property valued at £300,000.

Tip: It is worth noting that the higher the deposit you can come up with the better the interest rate and the terms of the mortgage will be, so we would always advise you to provide the highest amount of deposit that you possibly can, to reap the longer-term benefits of a better rate and the potential flexibility that could prove financially prudent in the future, i.e. lower early repayment fees.

So, how much do you need to save for your deposit?

Firstly, you need to work out what property you can afford to buy, based on your current income. 

Depending on your credit commitments, you are likely to be able to borrow for a mortgage 4.5 times your income as a single applicant. 

It is common for couples to apply for a mortgage together. In this case, most lenders will combine both incomes and lend you 3 times your joint salary, or 4 times the higher salary plus 1 times the lower salary.

Should you save to get a higher deposit?

There are pros and cons to this. On the plus side, as we have mentioned, the bigger deposit you can save the stronger position you will be in regarding better interest rates which equates to lower monthly repayments. 

Also, the bigger cash deposit you put down, the more protected you will be from getting into a negative equity position, where the value of your house becomes less than the mortgage you have on it.

Potential downsides of saving for a bigger deposit are that, if house prices go up whilst you’re saving, the amount you have saved becomes a lower percentage of the property’s value. 

Another point to weigh up is that, if you are renting whilst saving, you are spending money on rent that you’ll never see again, rather than spending money in mortgage repayments that you are investing in your own property for what will hopefully be your future financial gain.

Strategies for saving up for a mortgage

When you are in a saving mindset, it can be really useful to set yourself a monthly saving goal.

There’s an old adage “It’s easier to save a pound than earn a pound” which can be very true!

Really scrutinise your current spending and see where you can cut back. It’s amazing how many subscriptions people are paying for various TV channels, for example, that they could probably live without.

Another saving tip some people find useful is to assign cash to each category of spending – it’s so easy when you are paying by card to not really notice how much you are spending. But, when you have an envelope with £100 cash for your supermarket shop, it really focuses your awareness on every price of every item that you pick up off the shelves.

Making your savings work harder for you

The government runs a Lifetime ISA (Individual Savings Account) (LISA) scheme to help people to buy their first home or save for later life.

A LISA can be opened by anyone between the ages of 18 and 40, and it incentivises savers by topping up your savings by 25% every year. 

You can put in up to £4,000 each year until you are 50. For every £4,000 you put in, the government will add £1,000. You can choose to put in whatever amount you like under £4,000. For example, if you save £1,000, the government will add £250, and so on.

Anyone who opens a LISA aged 18, saving the maximum £4,000 per year until they reach 50, would receive £32,000 of free money from the government!

If you withdraw cash or assets for any other reason than buying your first home, or if you are over 60, or if you are sadly terminally ill with less than 12 months to live, you’ll pay a withdrawal charge of 25%. This means that you wouldn’t be losing your own money, only the government bonus you received on your original savings.

Don’t forget…

It’s easy to focus on gathering together all the money you can to get your deposit in place, but don’t forget to leave enough money aside to factor in all the other costs you will need to cover when you are buying a home… everything from paying for your survey, your solicitor, mortgage fees, moving costs, furniture, and so on.

What can you do if you have no way of coming up with a deposit?

If you feel that coming up with a deposit by yourself is way beyond your reach, other options you could consider involve buying as a couple or as a group, which would reduce the level of deposit each individual would have to put into the pot. This option would also increase your scoring in the affordability checks.

You may also be fortunate enough to be able to get financial help from family members, whether that’s in the form of a Family Assist, Joint Borrower or Sole Proprietor Mortgage, a gifted deposit, your parents’ income or even using their property as a guarantee for yours.

And, as we touched on earlier, there are some 100% mortgages available on the market, that require no deposit at all.

How PIL Southampton can help you 

Our friendly and knowledgeable team has a wealth of experience in the mortgage market, and our top priority is to give our clients support and advice. 

We are always up to date on the products that are available across the marketplace, to make sure we can find and help to secure the best deal to suit you and your individual circumstances.

How you can contact PIL Southampton

Our expert mortgage advisers are here to guide you through the mortgage process, every step of the way. You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.