Now, more than ever in the last 40 years, having a deposit to put down on your new home is important.

Most mortgage lenders want to see a deposit of 10% and even after help from the Government, it’s likely that you will need to scrape together yourself a deposit of 5% if you are to borrow at a reasonably competitive rate.

How should I budget to save?

Some people find it difficult to save. Whilst it might seem obvious that the more money you earn, the more easily you can save the surplus, it’s rarely the case. Most of us have a habit of living to - or sometimes beyond - our means! Anyone who has ever lost their job will quickly realise how many surplus luxuries there are to trim from their monthly budget.

The key to saving is to allocate a sum you wish to save first. Then add in all your basic monthly expenses like rent, community charge, energy bills, insurances, car payments, etc. Then move on to things like groceries and luxuries (or vices) like alcohol, cigarettes, etc. The annual holiday is an obvious opportunity to save cash. A caravan in Cornwall maybe? It’s usually here that many of us, even those of us with smaller incomes, can make some big savings.

At this point give some thought to what you might be able to live without. If you do, consider stopping smoking and cutting back on the wine or beer. This will save you thousands! Reduce the number of nights out and stay out of expensive rounds of drinks when out with friends. A smile and a brief explanation that you’re saving for a new home is easy and won’t offend anyone but the friend that never buys his own round anyway! Then buy your own.

Maybe change your grocer? Many low cost chains can save you 20-30% or more on a prudent weekly shop, and that Netflix subscription? Gym Membership? The expensive smartphone? The morning Starbucks? It’s amazing how quickly you can cut away fat from your budget when you have to do it. Instead of the lunchtime sandwich and morning coffee why not make your own lunch and take it in with you. Maybe stop the coffees every morning and reward yourself on the last Friday of each month with a Starbucks and a cinnamon bun!

The gym membership (if it’s used) is a worthwhile investment in your physical wellbeing, but what about walking every morning instead? Perhaps you could downgrade your car, reduce any car payments and cycle to work? That way, you’re saving money on gym memberships, car payments, expensive sandwich lunches and coffees as well as staying fit - bonus!

The key is to set a reasonable savings target per month and then budget to that. If you wait to see what’s left every month, you’ll always end up spending it. It just never works. Once you have set a reasonable figure, set up a standing order and make sure the money is paid into your chosen savings account 3 days after your monthly pay day. That way, it’s gone and you know what you have left to live on. This has the added benefit of trimming your budget which after just a few months will illustrate to any prospective lender that you can live to a budget and afford to save too. That’ll help a lot later when applying for a mortgage.

How can I best use my saved cash?

Once you have cash you need to decide how to best use it. The primary reason might be to have a cash deposit to put down on your home but there are lots of other costs which need to be met. As a first time buyer you might avoid stamp duty land tax on a cheaper home but you’ll still have solicitor’s costs, surveyor’s costs, moving costs and perhaps carpets, curtains, etc. Make sure you budget for these costs. The lender may be willing to roll-in the arrangement fee but remember, that means you are then borrowing it over the term of the mortgage.

If you have saved cash to buy the home of your dreams you might also try other sources of cash. The Bank of Mum and Dad is a great port of call if you’re lucky enough to have a ‘flush’ Mum and Dad. Another way to boost what deposit you have is to take advantage of Government Schemes. We mentioned the Save to Buy ISA above. You should also consider the Government’s Help to Buy Scheme.

Where should I save?

It makes sense to save your money in an account that gives you the best rate of interest. Unfortunately, at the moment, whilst interest rates are relatively low for mortgages, this means they are also very low on savings accounts. This means you won’t benefit greatly from the magic of compound interest.

If you are a first time buyer there is a scheme which is aimed at people trying to buy a home. It’s called the Help to Buy ISA.

The Help to Buy ISA has several benefits. Specifically;

  1. Because the savings account is an ISA you don’t pay tax on any returns you get from it.
  2. Because it is a specific Help to Buy Government Initiative, you will receive a special bonus of 25% of the monies you have saved over the period of the ISA up to a maximum of £3,000.
  3. The most you can get from the government is £3,000, so the maximum amount you can save in a Help to Buy ISA is £12,000. The minimum amount you need to save to qualify is £1,600.

The ISA is available to each first time buyer, not each house, so you may well be able to double this with your partner. Now that’s worth considering! Each person can open an ISA with an initial sum of up to £1,000 which also qualifies for the 25% boost from the government.

If you are not a first-time buyer you might consider higher rate savings accounts. You will generally get a higher rate the less flexible the terms for withdrawing cash, so make sure you are happy to tie up cash before opening an account. Make sure the account is protected under Government legislation. Government Savings Bonds are sometimes quite competitive for small savers, or premium bonds.

As an alternative to savings accounts some people might decide to invest in alternatives like online peer-to-peer lending like www.zopa.com or buying stock indices and unit trusts, bonds, etc. This might offer you a better medium/long term return on a lump sum, but it might not and remember, investing is not the same as saving. You could potentially lose all or part of your savings if an investment goes wrong. There is a risk associated with every promised return!

For advice on mortgages and what deals are best for you and your circumstances contact Mortgage Required on 01628 507477 today.

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