Saving for the Dream: Putting Aside Money for Your Home Down Payment

by Sean Bryant on April 26, 2015

Saving for the Dream: Putting Aside Money for Your Home Down Payment

To many people, the down payment required for the mortgage on a home is usually the number one obstacle to homeownership. Building a down payment through saving and investing is, of course, the way to go. It can be hard work, though. Interest rates are lower now than they have been in a long time, even as home prices (and down payment levels) continue to push higher and higher.

To help homebuyers, the Chancellor recently announced the launch of something called a Help to Buy Individual Savings Account. It aims to help first-time homebuyers put a down payment together. For every £200 that the homebuyer saves on their own, the government puts in a contribution worth £50 of its own.

How does the Help to Buy plan work in practice?

There’s a limit to the kind of contribution that you can expect from the government. The plan caps the Help to Buy bonus at £3,000. This means that a homebuyer will max out the benefits due saving £12,000. The government will turn it into £15,000.

The government literature states that on the average home, the Help to Buy contribution should work out to 10% of the down payment needed. The math only works out for homes in some of the cheaper parts of the country, though. For most other parts, the £3,000 contribution helps with no more than 5% of the average down payment.

A few restrictions apply. The contribution is only available on homes that cost up to £250,000 (£450,000 in London). To take advantage of the contribution, you also need to go to a bank, open an individual savings account for the purpose, and begin making deposits into it. To be eligible, you need to put in at least £1,600 a year, but no more than £200 in any one month.

Certainly, the scheme helps. It’s still up to you to do most of the heavy lifting, though. You still need to come up with between 90% and 95% of the down payment. How do you do this?

Pay attention to your credit file

A good credit report won’t directly help you save more. It will help indirectly, though. When you watch your credit score and make sure that it’s the best it can be, you will come by better terms with the credit card company. A cheaper credit card will mean better savings.

Good credit can also lead to better jobs with better pay. Best of all, it can lead to favorable terms when it’s time to apply for a mortgage. There is extensive advice available on personal finance columns and websites how to on improving your credit score.

Turn frugality to an art form

It may be hard to bring yourself to tighten your belt when you don’t have a definite goal to save for. When you do have a goal, though, it can actually be exciting to make sacrifices, and watch your savings grow  until you have the down payment that you need.

Certainly, you want to carefully create a budget, track down every unnecessary expense to get rid of, and save every penny that you can. Before you try that, though, you want to set up a clear goal to shoot for. Speak to a skilled real estate broker (http://www.bairstoweves.co.uk/) to learn how much home you can afford, and what kind of down payment you need to bring to the deal. Ideally, you should aim for something higher than the smallest down payment that lets you in the door. The larger your down payment, the more negotiating power you have with the mortgage.

Shop for the best returns

It’s far easier to switch accounts today than it’s been in the past. It’s important to go over every bank and account product out there, then, to find most favorable product. Each year, the personal finance websites rank a different account at the top for great interest rates. You need to follow the news and switch. It’s also a good idea that you use an individual savings account, rather than an ordinary account where 20% of everything that you make in interest is taxed.

Look for other places to park your money

If you believe that it’ll take you a few years to build up your down payment, you should study your investment options. From cash ISAs and fixed-rate bonds to easy access accounts and current accounts, you should do your homework and find the best options.

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Sean Bryant

Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.

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