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An expert’s guide on how to save for a house deposit

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In the modern age, there has never been a harder time for a young person to buy a home than the present.

Headlines regularly blame millennials' penchant for avocados for their lack of home ownership, but research from the Institute of Fiscal Studies has found house prices in England have risen by 173 per cent over the past two decades. Comparatively, the average pay for 25 to 34-year-olds has grown by just 19 per cent during the same time period.

The same research found that 40 per cent of adults in this age range cannot afford to buy one of the cheapest houses in their area, even with a 10 per cent deposit.

So is the home ownership dream hopeless? While we can ask for pay rises and switch to cheaper living situations, the secret, says director of Legal & General Mortgage Kevin Roberts, is good financial preparation.

Roberts tells the Standard: “Saving for a deposit is perhaps the largest barrier facing hopeful first-time buyers today. Add to this the increasing cost of rent and it’s hardly surprising that it can take people up to 10 years to get onto the property ladder. In many cases, the Bank of Mum and Dad continues to play an important role, accounting for one in every four housing transactions.

“However, first-time buyers should rest assured that there is other help at hand. Speaking to a mortgage adviser is a good starting point. They’ll be able to point prospective buyers towards the different products and schemes like Help to Buy that allow borrowers to get onto the property ladder with as little as a 5 per cent deposit.”

Where do you start when it comes to saving for a house deposit?

Recent research from Halifax found the average home deposit in the UK is £33,000 – yet, this figure varies across the country. In London, first-time buyers are expected to scrape together around £106,000 or 26 per cent of the average house price in the capital. Bleak? Yes, but the key to saving for a deposit is changing your relationship with money – and you don’t need a high salary to save.

Jessica Exton, Behavioural Scientist at ING, says: “How much people earn and how well they manage their money isn’t necessary correlated. You could earn a lot of money and be terrible at managing it. There are so many things that go into how we approach managing our money and how we learn to manage it as well.”

Interestingly, Exton said it’s generally happier people who are more likely to have savings – whether that is correlation or causation they don’t know – but it all comes back to the idea of mental accounting.

Exton explains: “We bucket our spending decisions into different categories. So we might have ‘fun money’, which we only use for going out and seeing friends, and then we have rent money and grocery money. We’ve already allocated this money to a certain bucket so it’s really challenging to take it from one bucket and put it in another.

“Things like pre-allocating savings when you get paid with a set amount going into your long-term savings account can be really useful, whether it becomes habitual will determine how well it works in the long run.”

Speak to a financial planner

When you decide to start saving for a house, one of the best things to do, says Roberts, is to speak to a financial planner.

He explains: “While it’s difficult to save for a deposit while renting, the good news is there is more flexibility and choice in the mortgage market than ever before. To get an overview of your personal finances, speaking to an independent financial adviser is a sensible first step. They’ll be able to provide a person with tailored advice to suit their circumstances and walk them through some of the tactics and tips to help them save for a deposit.”

Once you’ve spoken to a financial planner, you need to prioritise saving money – and this can mean making sacrifices.

“Making the reason you’re saving relative to you is very important - if it’s not important to you, then you’re going to be less motivated to do it."

Jessica Exton, Behavioural Scientist at ING

Exton explains: “Making the reason you’re saving relative to you is very important - if it’s not important to you, then you’re going to be less motivated to do it. Make the goal tangible and set small achievable goals to hit along the way.

“Everything you decide to spend money on will directly impact your savings and we need to make decisions about what is best for us to be spending the money on, given we have a certain amount coming in every month. We need to think about what we have and allocate it in the best way to maximise what we want. And we also need to think about what’s most important to us, our short and long-term goals and think about the actions that we’re taking to align with these goals before jumping in and making that purchase.”

Whether you have a good or bad relationship with money, saving for a house deposit is all about making financial sacrifices and, perhaps, putting more money into your savings ‘bucket’ than your social bucket. Talking to a financial adviser is a great way to get all your finances out in the open and see areas where you can afford to save, and looking at the tangible end goal (i.e. a house) can also help incentivise you to turn saving into a long-term habit.

Should you use a money saving app?

Exton says one way we can turn saving money into a habit is by using a money-saving app.

Alex Latham, CMO and co-founder of money-saving app Chip, explains: “The benefit of using a savings app is that whatever you want it to do, it will help you achieve that goal. How Chip works is you plug in your goal and you plug in how much you want to save and it works in the background to help you achieve it.

“The algorithm does it in a way that you won’t notice the money leaving your current account and going to your savings account. It’s working in the background, seeing what you can afford.”

The way Chip works is it connects to your bank account (using bank-level encryption) and analyses the money that goes in and out, saving a certain amount of money at the end of the week based on this analysis. The app also pays up to 5 per cent interest on savings meaning you can make money without realising it.

What is the Help to Buy scheme?

Since its launch in 2013, the Ministry of Housing, Communities and Local Government​ estimates that 81 per cent of applicants for the Help to Buy scheme have been first-time buyers.

The way this scheme works is the government loans up to 20 per cent of the property value, with 75 per cent coming from the mortgage lender and just 5 per cent coming from the buyer. While this is a great way to get your foot in the door, it’s worth noting this is only available for newly built properties.

What about shared ownership?

Roberts advises: “Shared Ownership is a great affordable alternative for first-time buyers, giving borrowers the chance to get onto the ladder with as little as a 5 per cent deposit. Borrowers purchase a share of the property, using a loan from a high street bank or mortgage lender. The remainder is then owned by a registered third party, usually a local housing association, and the homeowner will pay rent each month to this organisation. One of the benefits of the scheme is that the borrower has the option to staircase, allowing them to buy a bigger share in the property as and when they can, and eventually own it.”

Do you need a credit rating to buy a home?

While you traditionally need a good credit history in order to apply for a mortgage loan, Roberts explains that’s not always the case: “A borrower needs to be creditworthy in the eyes of the lender. That means they’ll need to meet affordability criteria and prove they can make monthly mortgage repayments.

“However, the UK workforce has changed significantly in recent years. There is a growing number of self-employed or ‘gig’ economy workers, and the financial circumstances of these borrowers often doesn’t gel particularly well with traditional credit scoring. Similarly, individuals with a ‘blip’ in their credit history, such as an expired credit card, missed phone bill or a change in bank account can fall foul of these scoring systems.

“The good news is that there are so-called specialist lenders that can cater to these individuals’ borrowing needs. These lenders assess applications on a case by case basis. They use underwriters to review a borrower’s unique circumstances and even take into account other sources of income, such as dividends, to help them with their mortgage needs.”

When it comes to saving for a house deposit, there are a number of factors to consider, but there are also incentives put in place to make saving easier. While saving for a home can seem like an endlessly steep mountain you need to climb, the first step is committing to a savings account and making regular payments – with each payment the top of that mountain will seem a little bit closer.

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