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House deposits: what you need to know
At the beginning of the year, the government announced that thousands of homes specifically for first time buyers will be built this year. The £1.2bn ‘Starter Homes Land Fund’ set up by the government will be giving money to 30 areas in England to develop and build new homes on brownfield sites.
To make sure these houses go to first time buyers, there is a restricted age limit for owners and all the houses will be priced at least 20% below market value. There has been criticism of ambitious timescales and a small budget from the government but many see this as a positive step towards helping those struggling to afford or find a property to get on the housing ladder.
Regardless of these new proposals, if you are considering buying your first home, you’ll know that you need to save a significant chunk of money for your deposit before you can even start looking at potential houses. What should you need to know before making the plunge? Check out our ten need-to-know points below:
Firstly, figure out your house price budget based on how much you can afford
The most important thing you should do before you speak to advisors or look at houses is work out how much you afford to save a month, how much your overall deposit will be and what your house price bracket will be. This information will give you a target to aim towards and stop you looking at houses you know you can’t afford. There are plenty of affordability calculators online that you can use to help you with this.
Save often even if it’s a small amount
Firstly, keep in mind that you don’t have to be saving thousands a month. Try setting up a direct debit to your savings account every week or month so you are always adding to your deposit. Also try matching your money saving with a goal such as losing weight so instead of your Friday takeaway or morning croissant you could place that money in your savings fund.
Make use of the Lifetime ISA
Help to Buy ISAs shut down at the end of last year and while they were useful and popular with the introduction of the Lifetime ISA later this year, they are now redundant. The Lifetime ISA places your money in a tax free savings account and can only be withdrawn on two occasions, when you are buying your first home (to be used as a deposit) or when you retire (to be used as a private pension). Speak to your bank or a financial advisor for more information about these new ISAs.
Try not to use loans and credit for your deposit
It takes a long time to save for a deposit and it can be tempting to borrow from a lender or use a credit card to put towards your deposit but this is not always a great idea. The high levels of interest, the potential for fines due to a credit card withdrawal and the negative impact this borrowing could have on your credit file make it a risky business to use these methods to help towards your deposit.
If you’re struggling consider borrowing from family
Families, especially parents and grandparents, usually help where they can when it comes to their loved ones saving for a house deposit. If you are struggling to save the last bit of your deposit, approach family, ask about borrowing money and set out exactly how you will repay it to them. You should really approach the situation calmly and showing that you intend on paying back the money over time.
Speak to a mortgage advisor and broker about your options
Mortgages can be confusing so speaking to a specialist in the area who knows exactly what they are talking about can be really helpful. Take a list of questions with you as well as your budget and how you’ll be able to afford your mortgage and monthly bills so the broker/mortgage advisor can help you find the very best deal for you.
Search the market for mortgage deals
There are plenty of mortgage providers offering a range of deals, so like with your energy bills and home insurance, you need to search the market for the best deal for you. Do you want fixed rate or variable? Fixed for 2 years or 5? Do you need/want an incentive such as cashback, free insurance cover etc. or not? Remember big name providers are not always the cheapest so compare, read independent reviews of the companies and enquire.
Take into account legal fees, searches, deposits etc.
An important area that many people forget when it comes to buying a house is the cost of legal fees, searches, your mortgage deposit etc. Legal fees are expensive and the more complicated the house purchase, the higher they will be. Searches, declarations of trust (if necessary), transfer of ownership deeds are all added onto your legal fees which are usually paid just before completion at the same time as the transfer of your house deposit to your solicitor.
Try and put down as big a deposit as possible to cut mortgage interest rates considerably
This is a very important point to remember and could save you thousands over the course of your mortgage term. Since the government lowered the minimum deposit percentage limit from 10% to 5% a couple of years ago, it has made it easier for many to get on the housing ladder. However, only putting down a 5% deposit usually comes with a significantly higher interest rate.
By putting down a 10% deposit instead of just 5%, it can result in a 0.5% interest rate drop or more. For a 15% deposit there another significant drop and so on. Although, after a 20% deposit the interest rate drop is significantly smaller but the more you put down, the more you could save with a smaller interest rate on what you borrow.
Only go ahead with offers and starting the buying process if you can afford it
Once you have an offer accepted on a property and you instruct a solicitor to work on the conveyancing, things start to get costly. So you should only go ahead with the buying process if you are sure you can afford the commitment and costs. It is legal to pull out before contracts exchange on completion day but it can be costly as you will still need to pay your solicitor for time worked up to the date of you withdrawing your offer.
For more information about mortgages, visit a mortgage advisor or a mortgage broker. For help with your finances, get in contact with an independent financial advisor (IFA).