Saving for a deposit
Saving for a deposit can take years if not decades, already. It’s also likely that mortgage applicants will need to have a larger deposit if/when we move into a recession. This will add more time to the savings process. Here are my tips and strategies for boosting your savings and getting you into your own home sooner.
Planning to buy your own home – the long game
If you are saving for a deposit for your first property, and in the UK, make sure you find out about Lifetime ISAs. Money Saving Expert will explain these much better than me. Essentially you can get a significant top up of your savings from the government (up to £1000 annually) if you are eligible. The minimum amount for opening one is only £1, so it’s worth doing early so you don’t miss out.
Get an idea of the likely cost of the type of property you are looking for. Then figure out how much you need to save for a deposit and the costs of moving. These costs are explained well by the Money Advice Service here.
Mortgage interest rates will be lower if your deposit is larger. For example, if you can borrow only 84% of a home’s value instead of 85% that will enable you to get a better deal. Thresholds tend to change every 5% until 60% when the rates are quite stable.
It’s also worth looking at your credit score in advance and doing things that will improve it. This will help you to get the best mortgage deals. For example, having a credit card and paying it off IN FULL every month is better for your credit rating than not having a credit card at all.
We were rejected for the first mortgage we applied for because my partner was “a bit of a ghost” when it came to credit. This meant we had to take a mortgage at a higher rate. We quickly fixed that and he got a credit card. He then used it for groceries and paid it off by direct debit every month and. When we applied for another mortgage two years later we were accepted by the first one. Registering to vote is also important as are a number of other factors so do research it.
Scrutinising your expenses
The next step is to list out all of your fixed and variable expenses. Your fixed expenses are living costs that recur regularly and cover your basic needs, such as rent, council tax, energy bills, transport to work, etc. Your variable costs may also cover basic needs (like your spending on food) or spending on socialising. However they are variable because they are much more under your control. Include all categories here and look at previous months’ spending to find an average.
Make sure you also include quarterly and annual costs here too (like car tax, or insurance if you pay it annually). Include those in your monthly costs, but make a note to transfer the monthly amount to a sinking fund for those events when they come.
You can do this as a list, in a budget spreadsheet, or use an app.
Take a hard look at your expenditure and think about how you can cut costs. Start with the big ticket items. If you want to save as much money as quickly as possible, think about any dramatic lifestyle changes you could make.
For example, to reduce your housing costs could you move in with relatives, or move somewhere cheaper for a year or two?
If your transport costs are significant, could you negotiate to work more from home. Alternatively is there a cheaper way of travelling, such as walking/cycling or joining a car share?
For energy, internet, insurance and phone contract, have you checked you are on the most cost effective deals? Check price comparison sites for everything. Saving even a few pounds on each of your monthly bills will really add up in terms of your deposit.
Then look at where you tend to indulge the most and get creative about how you can still enjoy these things at a fraction of the price. For example, if you love socialising in groups, can you convince your friends to do something less expensive? Dinner parties instead of eating at restaurants or could you sign up for a fitness challenge together?
If you love getting away from it all, maybe you could borrow a friend’s kit and go wild camping (instead of taking a short haul flight somewhere)? If reading rocks your socks, get your books for free. Make sure you have joined your local library and are signed up to their apps to borrow e-books and audio books. By still doing the things you enjoy doing, or picking up new interests, you will enjoy the process more and be able to do it for longer.
Sticking with it and staying motivated when saving for a deposit
Create daily money saving habits. If you do something every day, without fail, it does become easier. You remove the decision making, and it really has the potential to change your life. As Andy Warhol said:
“Either once only, or every day. If you do something once it’s exciting, and if you do it every day it’s exciting. But if you do it, say, twice or just almost every day, it’s not good any more.”
Also, if there is an area you are spending on that you really don’t care about then cut that completely. For me, it was clothes. I get a few things once a year but otherwise I don’t waste time or money on shopping. I don’t wear make up at all any more and I don’t miss it. It’s worth thinking about what you are used to spending on but actually wouldn’t miss.
Transferring to savings
When you have reduced your costs, put everything that you are not spending on your fixed or variable costs into savings.
I find the easiest way to do this is to work out my fixed monthly costs and put all of my variable costs on a credit card. As I get a credit card statement I know in advance what my variable costs for the month will be. I can save the maximum with more confidence, as long as I have also put aside for my sinking funds.
As an example, imagine I am paid £2000 a month. I know my fixed living costs are £1000 and I will need £100 for my sinking funds. My credit card bill for spending in the previous month will be £400 so I know that I can transfer £500 to savings as soon as I am paid.
£2000 (income) – £1000 (fixed costs) – £100 (transferred to sinking funds) – £400 (variable costs on credit card) = £500 (for savings).
Setting up systems that allow you to keep a high savings rate is a great foundation for the next stage. If you keep your costs low once you have your home then you can use the extra money to overpay your mortgage, invest or whatever will bring you joy and peace of mind.
Good luck with your saving for a deposit journey – I wish you every success.
If you are also saving for a baby, which seems to often coincide with saving for a house, check out the first post in my series on saving for maternity leave.
- Research where to save (explore Lifetime ISA if in UK)
- Set a goal taking mortgage deals into account
- Take steps to improve your credit score
- Look at your spending: fixed costs, variable costs and amount needed monthly for sinking funds
- Cut costs, getting creative so you still enjoy the things that you really value and simplify your life by cutting out the things that you don’t
- Implement daily frugal habits to save money on food and household costs
- Saving everything else