How to Save for a House Deposit - The Ultimate Guide

Which house prices reaching historic highs in recent months, more and more of you have been asking for help on saving your way towards a house deposit. Saving a house deposit isn’t just possible, it can be fun too. This guide will explain how to save for a house deposit in four easy steps:

Plan
Earn
Retain
Save

How to save for a house deposit in four steps

This deposit-saving guide is split into four sections. If you’re new to saving then we would recommend you read all four steps as they’re absolutely necessary to save up a house deposit. Here’s a short overview of what we’ll cover in each section:

Plan: Calculate how much you’ll need to successfully apply for a mortgage.
Earn: Invest in your career and make good decisions to enhance your lifetime income
Retain: Budget well and keep spending within your limits to ensure that a healthy portion of your income can be redirected into savings
Research the market for savings and investment products, and obtain financial advice if necessary, to ensure that you are making your money work as hard as possible for you.

Step 1: Plan

To begin your saving for a house deposit journey, it will help to have an idea of where your destination is. To do this, you’ll want a house deposit target which is:

Accurate
Realistic
Future-proof

To create an accurate house deposit estimate, you’ll need to pick out your house. Not the actual house you will buy, of course, but a representative example. We’ll use this house to base our calculations upon.

I’ll use the following house as an illustration.

At £250,000 this house is just below the national average house price of £265,000, but above the average when London is excluded.

How to calculate the size of the house deposit you will need to save

With your house price in mind, here’s how to calculate the minimum house deposit you’ll need to save:

Take the full list price of the home and multiply by 5%. This will give the size of the deposit needed to secure a ‘5% deposit’ mortgage, also known as a ‘95% Loan to Value (LTV)’ mortgage.

5% mortgages are the most generous mortgages available, in the sense that they allow you to buy a house with the lowest deposit. However, they are riskier for the bank to offer because as the borrower you are providing only a small fraction of the loan value as equity.

Therefore we recommend that you also calculate 10% of the house value. 10% deposit mortgages, also known as 90% LTV mortgages are offered more widely and are popular with first-time buyers.

House deposit calculation in action:

The house I’ve picked is worth £250,000 so I would need 5% of £250,000 = £12,500 for a 5% mortgage or £25,000 for a 10% deposit mortgage.

Do we have our savings target yet? Not quite.

Our target should be reliable and future proof. This savings goal would be outdated if house prices rose any further. Yet we expect to make our house purchase several years in the future, so we need to uplift the target to take this into account.

For each year that will pass before purchase, you should multiply the house price by a factor. We use 1.03, which adds 3%. This assumes that house prices will increase by 3% per year on average.

If I expect to buy a house in 4 years time, then I would calculate the future house price as £250,000 x 1.03 x 1.03 x 1.03 = £273,000.

Then, applying the deposit ratio gives me a target of £13,650 – £27,300 for a 5% or 10% mortgage respectively.

Step 2: Earn

Forget about collecting money-saving coupons or buying cheap meat. The easiest way to saving more money is to earn more, not to save more. That’s why earning is the second step in your journey to saving for a house deposit.

Let’s think about this strategically. Houses come at a massive cost – one which must be paid off across your working life. To ensure that you can afford your dream home, you’ll want to think strategically and ensure that you are maximising your lifetime earnings.

Your lifetime earnings are most impacted by your:

Choice of career
Level of education
Work experience
Whether you are prepared to work long hours and compete to outperform your peers

When we think about the very short term, these factors are practically fixed. You cannot complete a phase of education in a week, nor can you change your career in a day. Right now, you have a set of cards in front of you and these are the only cards you have been dealt.

However, each of these factors, which each have a very powerful influence upon your earnings potential, are fluid in the medium to long term.

House buying is a game of a lifetime, and that means you have plenty of time for you to draw as many new cards as you’d like.

For inspiration, we could remind you that Colonel Sanders was 50 years old when he finalised the secret original fried chicken recipe. He hadn’t even thought about opening more than one restaurant at that stage!

The Colonel held totally unrelated jobs to KFC until later in life

Which jobs earn the most?

For reference, the highest paying jobs (career paths) in the UK are:

Executive director (Management)
Lawyer (Legal)
Actuary (Insurance)
Chief finance officer (Accounting)
Doctor / Surgeon / Dentist / Vet (Medical)
Sales / Marketing director (Sales)
Architect (Engineering)
Software engineer (IT & computing)

Each of these career paths provides the opportunity to earn a salary above six figures, and several (including accounting and software engineering) no longer require an undergraduate degree.

Let’s be totally clear – you don’t have to hit the big bucks to save for a house deposit, but it’s clearly easier to reach any savings goal if your net pay is high. Aiming for these careers could help you achieve a more comfortable life with fewer trade-offs.

Other ways of maximising your earnings

Here are some ideas for upgrading your take-home pay without handing in your notice or changing your career.

Take on a second job
Turn a job into a hobby
Buy & sell items in your spare time
Become a freelancer

Step 3: Retain

Now you have taken action to receive the largest pay packet you can, the focus becomes where all this money goes.

Do you find it easy to end the month with money left over, or do you spend every penny you have (and perhaps more?).

Whether you’re a natural saver or a natural spender, you’ll benefit from a good monthly budget that formalises what you’d like to achieve with your money.

We’re about to surprise you when we say that whether it’s a detailed plan or just a high-level target on a piece of paper; it doesn’t matter.

Simply doing the following two things will change your mindset towards money:

Making a promise to yourself at the start of the month
Holding yourself to account at the end of the month

A budget helps to ‘gamify’ the process. Gamification is where you turn a challenge or problem into a game which provides you with ‘wins’ and hits of dopamine along the way!

With a budget in the back of your mind, turning down an opportunity to spend is now a victory, and it’s easy to visualise the surplus you’ll have at the end of the month. It’s easy to say no when ‘no’ leads to a tangible result.

Each time you sit down for a quick review at the end of the month, you’ll be able to track and measure your progress towards saving for a home deposit.

How to save for a house deposit faster

Here are some useful Financial Expert tips to help you save money quicker:

Focus on the big stuff – where you live and the car you drive will have more impact on your spending than anything else. Be prepared to challenge and re-assess these big expenses before you move to cut down your daily spending. Downsizing or down-branding your accommodation or car is a fantastic money saver because the savings are automatic.

Don’t rely upon willpower alone – it will run out. We often begin a frugal phase with high motivation and treat frugality like a hobby. However, this tends to only last until we suffer a setback, an emotionally low period, or a loss of willpower. Will-power is only temporary and therefore any plan that relies upon us constantly saying ‘no’ to things we want to say ‘yes’ to, is doomed to fail.

This is why tip #1 is so effective – no willpower is required because a lower rent or vehicle payment is contractual and won’t bounce back up just because we’ve had a bad day at work.

Think about how you buy, not just how much you buy. It’s easy to jump to the conclusion that saving money is about buying less. But a strategic point of view would ask; are you making your purchases through the right channels to get the best price for that product?
1. Are you spending more for branded products made at the same factory as a generic equivalent that has exactly the same look / features / taste?
2. And are you shopping via the most efficient route which will get you the best price? Have you shopped around online before making an in-store purchase?
3. Have you utilised all available cashback offers and vouchers before you click buy?

Step 4: Save or Invest

You’ve earned a wage, you’ve held onto as much of it as possible. It’s time to decide where to save or invest your money to get the best return on your funds.

Should I save in a bank or invest in the stock market? is a common question with a complex answer.

Stock market investments are only suitable for investors with an investment time horizon of 5 – 10 years. This is because the market can often dip for prolonged periods. Any investor in the market only for a short time runs the very real risk of shrinking, rather than growing their house deposit.

Most people saving for a house deposit decide to use a low-risk savings account such as a Cash ISA, or a cash Lifetime ISA to store there money.

These accounts don’t pay an attractive rate of interest, but it’s still recommended to use them rather than hold your money in your current account.

Moving your money away from a current account helps to protect you from significant losses due to fraud (such as someone using your debit card without your permission), and it removes the temptation to spend it!