First time buyers: some tips to help you raise a deposit

Falling house prices is good news for first time buyers - even if it’s not very cheery for the rest of us.  The house price indices indicate that a decline in demand and lower prices are more than a seasonal blip. According to Hometrack, over the last five months the supply of homes for sale has grown by 14% while demand has fallen by 2% - a trend that is depressing prices. 

But even if properties become more affordable, if you want to buy your own home, making a specific plan will be the only way for many.  Currently some 84% of first time buyers under the age of 30 have had help with the deposit from their parents when they bought their first property, according to figures from the Council of Mortgage Lenders.  This is more than double the number reported during the same period in 2005, when 38% received financial support. Fine – but only if you have parents with cash to spare.  What do the rest of first time buyers do?

Can you afford to buy?

The average price of a property is around £170,000 and to afford a 90% mortgage of £153,000 a young couple would need joint incomes of around £44,000 a year.  Given that the average wage is around £24,000 a year, but more near £35,000 in London and the south east, buying is not impossible - even if you have to pay £250,000 for your first flat.  So how do you save that all important £20,000 needed for the minimum 10% deposit and expenses?

With joint earnings of £44,000 a year, take home pay after tax and National Insurance will be around £34,600.  Setting a realistic timescale of two years, you will need to save £10,000 a year.  How do you do it?  The first thing to bear in mind is that if you have a £153,000 repayment mortgage at, say, 6%, this will cost you £997.56 a month or £23,941 over two years.  This is pretty much what you need to save over the coming two years so the sooner you get used to putting away £1,000 a month the better.  If you can’t save £10,000 a year you won’t be able to afford the mortgage anyway.

The quickest way to save money will be to persuade parents to let you remain living at home, doing away with rental costs.  This will save around £5,000 a year given that the average cost of a double room in a shared flat is around £100 a week.  The thought of having you living at home for the next two years might even persuade parents to start a savings plan on your behalf to help with the deposit.  So here is the action plan.

Start saving - now

Both start a savings plan for the £200 a month you would otherwise have spent on rent.  After two years you will have around £10,000 of your £20,000 target saved.  

Arguably you could afford to save £400 a month each if you are not paying rent which would mean you would reach your target of £20,000 after two years.  This would still leave you with joint spendable income of £2,083 a month.  Even if you were renting and spending £850 a month on rent a determined couple could still reach their target of £20,000 over two years – and still have well over £1,000 a month spending money.  It just depends how much you want to buy your own home.

With savings rates so low it is probably better to save with a mortgage lender which also has competitive 90% first time buyer mortgage deals rather than worrying about getting the best return on your savings. 

Yorkshire Building Society and Newcastle Building Society both fit this bill. Yorkshire has a good 90% first time buyer loan at 4.95% fixed for two years with a fee of £995.  Newcastle Building Society currently has both fixed rate and tracker mortgages available to first time buyers with only a 10% deposit required.  There is a two year fix at 5.3% and a two year tracker with a current pay rate 4.49%.  Both have comparatively modest fees of £694.

Saving with a mortgage lender over two years will stand you in good stead when you come to apply for a home loan.  Yorkshire in particular has a commitment to lending to first time buyers and is offering 2% on its Fixed Rate Anniversary Isa on sums of £100 up to the annual limit of £5,100 - and the return is tax free.  Newcastle is also paying 2% variable and tax free on its Access Isa with a minimum investment of just £1. 

Cut expenditure

Other ways to save money include giving up smoking.  A twenty a day habit costs £42 a week and giving up would save £4,368 over two years - £8,736 for a couple.  Cutting out a daily Starbucks at £1.50 and a sandwich at £3.50 and taking a packed lunch saves another £5 a day, £25 a week or £50 a week for a couple.  That is another £2,500 a year towards your target £20,000. 

If possible, walk or buy a bicycle and cycle to work.  Being realistic about how far it is possible to cycle, this could easily save you £50 a month or more on tube fares.