How to build up savings to mortgage deposit in the UK?

Banks virtually always require a specific deposit when lending mortgages. For a home mortgage, this is usually between 5% and 20%, and for investmentbuy-to-let mortgages, it is 25%-40%. Of course, you can also pay more - as a general rule, the larger the deposit you accumulate, the better the mortgage terms will be. With current property prices in the UK, raising even 10% of a property’s value can be a huge financial challenge for many people. With this in mind, we’ll walk you through some of the ways you can make it easier for yourself to raise savings for a deposit.

Lifetime ISA

The first sensible and highly effective way to save money is with a Lifetime ISA account. This is a tax-free savings account that can be opened by anyone aged between 18 and 39 and deposited into it until the age of 50. It is designed for people who have the prospect of saving for retirement or their own home in the long term. What makes such an account particularly attractive is the support from the government in the form of a financial bonus. Each time funds are deposited into the account, the government transfers a further 25% of the deposit in question into the account. For example, when the owner deposits £400 at one time, they will receive a bonus of an additional £100.

Unfortunately, there is one catch that makes the Lifetime ISA account not a perfect product. The maximum amount that can be deposited into the account in one year is £4,000. This means that the combined bonus from the Government that one person can receive by depositing the maximum amount from age 18 to age 50 will not exceed £32,000.

You can use the funds from your Lifetime ISA account to pay the deposit on the purchase of your first property. To do this, you will need to notify your solicitor during the purchase process, who will apply for the funds to be transferred to the LISA provider, who will then allocate the funds directly to the property purchase. It is worth noting that such a process can only be carried out by a solicitor or conveyancer- you cannot do it yourself. It is also important to ensure that conditions are met, such as:

• **The buyer has First Time Buyer status **- the property in question must be the buyer’s first property over their lifetime. The person making the Lifetima ISA withdrawal must not be a homeowner either in the UK or in any other country;

• The value of the property must not exceed £450,000;

• The Lifetime ISA account must have been active for at least 12 months prior to the purchase;

• The property must be bought for personal use only - it cannot be used as a rental property.

It is worth knowing that if you decide to make a joint purchase, it is possible to combine funds from two Lifetime ISA accounts, provided neither person already owns a property.

As most of our customers collect a deposit for a mortgage over six to 24 months, setting up a Lifetime ISA allows you to receive between £1,000 and up to £3,000 from the Government.

For more on the Lifetime ISA, see the article we dedicated exclusively to it.

Financial markets

Another way to put money aside is to invest in the stock market. It offers a wide range of options - from risky, short-term investments to slightly safer, long-term solutions. In the context of saving money to build up a deposit for a mortgage, you should probably focus on short-term investments. These offer the chance of high returns, but also involve more risk. Examples of popular assets that can generate returns in the short term include:

• Shares of companies with high volatility;

• Forex, which is the trading of foreign exchange securities to take advantage of short-term price movements;

• Cryptocurrencies, or recently popular digital assets;

• ETFs, or units of investment funds;

• NFTs, or unique digital assets.

To make effective use of this way of saving, one must take the time to learn and choose the right strategy. Every financial instrument is different and their quotations depend on various factors, such as the macroeconomic situation, monetary policy or investor sentiment. Without proper preparation and knowledge, investing in risky, speculative assets can lead to losing savings instead of multiplying them.

In the vast majority of cases, investing in the financial markets is not a good idea. If you are not a financial professional, you could lose your money while putting yourself under a lot of stress.

Savings accounts

Savings accounts, are a popular way to multiply your savings offered by most banks. Such accounts provide much more security compared to investments in the financial markets, but the returns are lower. The interest rate on savings accounts is set at the time of signing the contract, allowing customers to estimate their returns at a time of their choosing. Some savings accounts provide free access to funds, making it possible for customers to deposit and withdraw funds as they wish. The most popular types of savings account are:

• **Standard savings account **- this account allows free access to the funds and offers variable interest rates, often lower than the other options;

• Limited access savings account - in this case the interest rate is higher, and to withdraw the accumulated money you must notify the bank in advance;

• Fixed interest savings account. The funds are frozen for a specific period (usually one to five years) and the interest rate is also higher than for a standard account;

• Tax-advantaged account. While returns on other savings accounts are subject to Income Tax, tax advantaged accounts are exempt from it. In the UK, such an account is, for example, the Lifetime ISA account mentioned above.

Bank deposits

Bank deposits are another safe way to save money. These are bank deposits in which you can place your money for a set period of time in return for a predetermined variable or fixed interest rate. As with savings accounts, bank deposits are divided into several types:

• Term deposit. This is the classic type of deposit where the funds are frozen for a fixed period and the interest rate is fixed.

• Progressive deposit. In this case, the interest rate increases with each fixed period (for example, every quarter).

• Dynamic deposit. It provides the possibility of withdrawing funds before a fixed date without losing all interest.

• Currency deposit. In this variant, the deposit is held in a foreign currency.

Is it worth saving money in the form of physical cash?

Of course, there is another way of saving money that is familiar to everyone. Namely, it is to collect cash in one’s home. This solution has its advantages, as it provides access to funds immediately and the saver does not become dependent on other institutions. In addition, the person holding cash in physical form does not have to pay account fees or pay taxes for the interest rate. This is certainly a convenient way, but unfortunately not very efficient. First of all, the money loses purchasing power through inflation, which in 2024, for example, was between 4% and 5%. The interest rates that are provided by banks in the form of deposits and savings accounts support savings and protect them to a large extent from the negative effects of inflation.

There are also other negative aspects of keeping savings in cash. When keeping cash at home, funds are not very secure. According to the Office of National Statistics (ONS), there were as many as 261,965 reported incidents of home burglaries in the UK in 2017. For unexplained reasons, the government does not release more recent statistics, but given the crime rate, it is conceivable that this figure may have increased. It is also worth noting that banks are reluctant to consider paying a deposit in cash when granting mortgages. They may require proof of its origin at the underwriting stage, which can be a difficult task to achieve.

Summary

It is worth choosing a way of saving that protects the funds from inflation and guarantees their safety. Among the safest choices in this case are savings accounts and deposits. An even more favourable option is to invest your savings in assets that will yield additional returns. However, it is important to remember that, in order to invest effectively, you should deepen your knowledge on the subject and take the right strategy that will allow you to profit in a well-considered way.