How to save for a mortgage deposit

How much will you need to buy your first home?

Saving to buy your first property can be daunting - but having a clear and realistic plan can make it feel much more achievable. The first step is work out how much you need to save.

Your deposit is by far the biggest thing you'll be saving towards. It will usually need to cover at least 5% of the cost of the property, with a bank or building society lending you a mortgage to cover the rest.

Browse websites such as Rightmove to see how much properties cost in the area you want to buy in, then use our borrowing calculator to get a rough idea of how much you might be able to borrow. 

Generally, the less you earn, the smaller the mortgage you'll be offered – meaning you may need a bigger deposit than 5% to buy the property you want. If you buy with someone else, you’ll be able to apply for a larger mortgage, and potentially build up a bigger deposit.

Find out more about mortgages and deposits:

• How much deposit do you need for a mortgage?
• What is a mortgage?
• Deposit calculator: when will you be able to buy?

Other costs to factor in

The amount you’ll be spending on commuting, contents insurance and utilities such as gas, electricity, water and council tax may also change.

Then there’s the cost of decorating and furnishing your new home. This will vary depending on how much work you want or need to do.

Find out more:

• The cost of buying a house
• Household bills you'll pay as a homeowner
• Council tax calculator

How to save for a deposit more quickly

After working out how much you ideally need to save each month, you should set a plan for how to achieve it. Here are some ideas:

1. Reduce your bills

Perhaps the most satisfying way of saving money is to reduce your outgoing bills. Do this by:

• Switching your energy bills to cheaper tariffs, if your landlord will let you.
• Shopping around for cheaper mobile phone and broadband packages.
• Checking your council tax – if you live alone, and in a few other circumstances, you can get a 25% discount on your council tax bill.
• Cancelling unused subscriptions, eg TV and music streaming, gyms, clubs, newspaper and magazines.

2. Cut down on everyday spending

It might be a cliche but making small changes to your everyday outgoings really can add up over time.

Check your bank statement and have a look at what you're spending on – some banking apps automatically break spending down into categories, which makes the process easier.

Perhaps you hadn’t realised that the daily cup of coffee you buy costs you £600 a year, or that you’ve been spending £150 on clothes every month.

Identifying any areas you can cut back on – eg taking coffee from home in a thermos flask, or limiting yourself to one new clothing item a month – can free up substantial amounts of cash to be stashed away in your deposit fund.

3. Earn on the things you do spend on

Use loyalty cards and consider taking out a cashback credit card, which will enable you to earn a percentage of what you spend in the form of credit on your bill.

To max out the benefits of a cashback card you should use it for all your everyday spending but pay off the balance in full every month, as the interest you’ll be charged could outweigh the cashback you earn.

Using a credit card responsibly will also help to improve your credit score - important for when you apply for a mortgage.

4. Consider a saving/budgeting app

There are a number of apps that will funnel away your spare cash, building up your funds for a deposit.

Some can round up your spending to the nearest pound and deposit the difference into a savings account.

Others use an algorithm to analyse your financial behaviour and decide how much you can afford to spend. 

The downside of these apps is that they don't usually pay interest on the amount you're saving – so, once you’ve saved, you should transfer the funds to an account that does pay interest.

• Find out more: best budgeting apps

5. Assess your renting situation

A more dramatic step, but the one that could potentially save you the most money, is changing your current living situation.

Increasing numbers of people saving for their first home are choosing to move back in with their parents. Assuming this move will mean you pay below-market rent (or even none if you're very lucky) and spend less on bills and food, you could save hundreds every month and reach your deposit goal much faster.

Of course, this isn't an option for everyone - but changing how you rent could also save you money.

If you currently live alone, you could save a significant amount on bills and rent by getting a lodger (you'll need to check this with your landlord and may need a new tenancy agreement), or by moving into a flatshare.

If you want to keep your own space, you could consider moving to a cheaper area - though if this would mean a longer commute, check whether the extra travel costs would outweigh the savings in rent.

6. Make extra money

Increasing your income is another way to boost your deposit savings.

There are countless ways you could do this, from freelancing in your spare time or setting up an Etsy shop to renting out games consoles or selling stuff you no longer use.

Be aware that you may have to submit a self-assessment tax return and pay income tax on any extra money you have coming in.

Saving into a lifetime Isa

In order to see your savings grow, you ideally want to save them in an account offering a rate that beats inflation – otherwise the cash will end up losing value over time.

While there’s nothing wrong with a traditional savings account, if you’re saving a large sum of money you may have to pay tax on the interest your savings generate.

If you deposit your savings into an Isa, they’ll remain tax-free - and, if you save into a lifetime Isa, you could also get a government bonus of up to 25% on your savings when you buy your first property.

Saving into a regular savings account

Regular savings accounts often pay attractive headline rates of interest and can be a good way to make sure you're putting money aside every month. 

But they often have restrictions that you need to watch out for. For example, there may be limits on the number of withdrawals you can make each year, you may receive less interest if you miss a month of savings and you may need to have a current account with the bank. 

• Find out more: best savings account rates
  

Instant-access vs fixed-rate savings accounts

If you already have a small lump sum built up, but it’s going to take you a few years to save up the rest of your deposit, you could get a better rate of interest by locking your money away for a year or more.

You could consider a one or two-year fixed-term fixed-rate savings account for your lump sum, and then use your cash Isa allowance or a regular savings account for the remaining amount of the deposit that you need to accumulate.

Investments when saving for a mortgage deposit

The key to saving for your deposit is to make the most of every penny you save. With savings rates still at record lows, you may be tempted to put some of your money into the stock market to try to achieve a better rate of return.

However, when you invest your money, you put it at risk of falling in value. You'll have the potential to make better returns than the bank, but you could do much worse. It may take several years to recover from any falls in the stock market, setting back your plan to get onto the property ladder.

Things to do while you save

While you’re busy saving for a deposit, there are also things you can do to improve your chances of successfully getting a mortgage once you're ready to apply.

Mortgage lenders are more likely to say yes if you:

• Have a regular income and long-term employment
• Have a good credit history
• Are on the electoral register
• Have all your paperwork prepared.

This isn't to say that you won't be able to get a mortgage if you're self-employed or have a bad credit history, but it could make it harder to get a decent rate. 

What to do if you can't save a big enough deposit

Even if you meticulously stick to all of your budgeting plans, sometimes reaching your savings target can remain out of reach. The good news is there are options:

Buy with friends or relatives

It’s becoming increasingly popular for siblings and groups of friends to buy property together.

Some mortgage providers offer joint mortgages to groups of up to four people. They’ll usually only take the income of the two highest earners into account, but everyone is equally responsible for making the repayments.

If anyone wants to leave the property or sell the house, things can get a little complicated, so make sure you take legal advice before buying.

• Find out more: joint ownership of property

Get help from your parents

Many parents want to help their children get on the property ladder, and there are several ways to do this.

Some first-time buyers are in the fortunate position of being offered a cash deposit from their parents, either as a gift or a loan. This will need to be declared to the mortgage provider and you'll need to fill out official documents confirming the arrangement.

• Find out more: how can parents help first-time buyers? 

If a gifted deposit isn't an option, it's worth exploring guarantor mortgages. These enable you to borrow with a small - or even no - deposit, provided your parent or family member offers their property or savings as security against the loan. The family member has to be willing to cover the mortgage if you miss a payment.

• Find out more: guarantor mortgages

Look into shared ownership

Shared ownership schemes allow you to buy a share of a property (usually between 25% and 75%) and pay rent on the rest.

The main downsides are that getting a mortgage on a shared ownership property can be tricky and it’s hard to increase your share if the property’s value increases.

• Find out more: shared ownership

Starting to house-hunt

By the time you're ready to start house-hunting, you'll probably have a good idea of the areas you might want to buy in.

If you have a few different places on your shortlist, check out house prices, quality of life, schools and more to help you choose the best place to live.

You'll need to register with estate agents before going on viewings, and it could also be worth getting a mortgage agreement in principle (AIP). This is a document confirming that a mortgage lender would be willing to lend you a certain amount, and can be helpful in confirming your budget and proving that you're a serious buyer.

• Find out more: our step-by-step guide to buying a house explains the entire home-buying process simply and clearly.

How to choose a mortgage

Finding the right kind of mortgage for you depends on a range of circumstances, so it’s always worth doing your homework.

There are several different types of mortgage and it's well worth taking professional advice on the best option for you. Don't automatically go with your own bank as they may not offer the cheapest or most suitable available deals.

We'd recommend talking to an independent mortgage adviser, also known as a broker. Look for one that's 'whole-of-market' - this means they can look at all the deals available, rather than a limited range. 

• Find out more: how to choose a mortgage broker

Ending your rental agreement

On a practical level, moving from a rented property to the one you're buying can be tricky – especially if you have a fixed-term tenancy agreement and unknown completion date to deal with.

How to end your tenancy

You'll need to check your tenancy agreement, as terms will vary.

If you’re signed up to a fixed-term tenancy, you can only leave early if there’s a break clause, or if your landlord agrees that you can ‘surrender the tenancy’.

Landlords may be more likely to allow this if you can find a replacement tenant, but it is at the landlord’s discretion. Otherwise, you’ll be responsible for paying rent until the end of the tenancy.

If your tenancy has a break clause, this will be stated in the tenancy agreement, along with when the break clause applies and how much notice you have to give.

You need to give your notice in writing and deliver it to your landlord either by recorded post or by hand, unless your contract explicitly states that you can send an email.

If there’s no break clause and your landlord agrees that you can surrender the tenancy, ask them to confirm the agreed leaving date in writing.

If you’re in a fixed-term joint tenancy, you may need to get the other joint tenants to also give notice.

Lastly, if you’re in a rolling tenancy – also known as a contractual periodic tenancy – you can leave at any time, but you must always give notice. How much notice you need to give should be in your contract.

If you’re in the process of buying a property at the same time as having to renew a fixed-term tenancy agreement, explain the situation to your landlord and ask whether they could offer you a rolling contract or a shorter term.

If not, it might be worth moving somewhere with a more flexible contract or even sofa-surfing until you’re in your new home.

When to end your tenancy

You won’t usually need to think about giving notice on your tenancy until you’ve had an offer accepted on a property. Here are some tips on managing the process:

• Have a back-up place to stay – property purchases can often be delayed, so it’s worth thinking about where you'll stay if this happens. Your estate agent should be able to find out how many people are above you in the chain – if it's more than two, be prepared for delays.
• Negotiate your completion date – if you have to give a month's notice on your rental property, ask whether you can complete your property purchase a month after you exchange contracts. This means you won't have to give notice until you know there's no risk of the purchase falling through.
• Make your landlord aware of your situation – depending on your relationship with your landlord, they might appreciate the heads-up that you’re planning on moving and be more flexible if you run into difficulties.
• Have money saved in case you need to pay rent and a mortgage at the same time – sometimes it's unavoidable that you end up buying your home before your tenancy has ended. While having to pay rent and a mortgage is annoying, it’s usually less stressful than moving out of a rented property with all of your possessions before your purchase has gone through.