Saving For A House Deposit

Jane Baker looks at how first-time buyers can save for a deposit.

This article was originally sent to Fools via email on January 7th. 

As our 'Your Finances in 2012' campaign continues, I'm going to look how first-time buyers can save for a deposit. After all, a deposit gives a home owner greater security if property prices start to fall.

And Fool pundit David Kuo isn't optimistic on that front. In part one of his 2012 report, he forecasts a dramatic 20% fall in house prices during 2008! He then reckons there will then be a normalised growth rate of around 8% in the following years until 2012. By this time he believes the average house price will be £185,410, £13,000 less than the price of a typical home today.

While this may not be particularly welcomed by for those of you who managed to buy a home in 2007, I expect the first-time buyers among you have got your fingers (and toes!) firmly crossed that David's got it right.

There hasn't been much good news for wannabe home-buyers in recent years but, if this prediction is correct, the tide could now be turning in your favour. So, if 2008 really does represent a better buying opportunity, here's how to boost your deposit putting you in the best possible position before taking the plunge.

Cut-back

I know it's not terribly exciting but if you tighten your belt, even just a little, you'll be amazed at the extra savings you can make. Even basic cut-backs such as walking to work instead of driving or using public transport, taking homemade lunches to work or sacrificing the occasional night out for a cheaper night in quickly adds up.

The key to cutting back successfully is to draw up a budget taking into account all your essential expenditure and then sticking to it. It's also good practice to keep a record of your spending. That way, you'll be able to identify where further savings can be made.

Save Hard

Once you have worked out how much you can save each month it makes sense to start a savings plan and contribute to it religiously. First and foremost consider a Cash ISA to benefit from a tax-free return. If you haven't invested anything already, you can deposit up to £3000 in a Cash ISA by 5th April 2008 and a further £3,600 after that. National Counties Building Society is currently offering a competitive tax-free return of 6.26% AER with instant access.

For further savings you could go for a high-interest regular saver account although you'll usually be expected to deposit a minimum amount each and every month. But be warned, these accounts are often available for a specific term during which your cash may not be easily accessible.

Alternatively there are some pretty good instant access accounts out there which are generally less restrictive. Take a look at The Motley Fool's Savings Centre to compare different accounts.

If you don't have masses to save to begin with I like ICICI Bank's HiSave Savings account which pays 6.41% AER and can be opened with £1. Or, if you have a lump sum of at least £1,000, Heritable Bank's Easy Access Issue 2 is also a good choice with an interest rate of 6.46% AER.

Once you've found the right account build up the largest deposit you can. Generally speaking home-buyers with higher deposits will qualify for better mortgage deals. So get saving as soon as you can and good luck with buying your first home.