How can I save for that house which feels so far from reality?
11 July, 2017
We talk Help-To-Buy ISAs and other options which can get you on the right path.
You’re not imagining it, houses are very expensive: They are also, without doubt, more expensive than they used to be. And you, personally, are poorer than you would have been 25-years ago. Sorry about that, but hey, I’m not a baby boomer, and you can blame them.
According to this report (https://www.ifs.org.uk/uploads/publications/comms/R117.pdf) by think tank Institute for Fiscal Studies, those aged between 22-30 have seen a drop in their income over the past seven years. In stark contrast, people aged 60 years old and over saw income jump by 11% over the period. Mortgage payments now form, on average over 30% of income, compared to 25% in the early 1990s.
The best option may appear to be to nab a passing baby-boomer and shake them out for a little cash. However, there are non-violent approaches to saving up a deposit, mortgage rates are still low and availability is improving. Here are some thoughts on how to build up that elusive deposit:
Take the handouts #1
The Government is willing to give you cash to buy your first home, so don’t overlook it. This help comes in a number of guises. First is the help-to-buy ISA (https://www.boringmoney.co.uk/learn/learning-paths/saving-for-your-first-property/). This allows you to save up to £1,200 in your first month, then up to £200 a month after that. The government tops this up by 25% up to a maximum government contribution of £3,000.
The drawbacks to this are that you can only put it in cash, so it isn’t likely to grow very fast. This used to be a problem when the housing market grew at the pace of an energetic toddler, but it may not be such a problem post-Brexit. Also, £15,000 doesn’t go very far in London or the South-East. And if you decide not to use it for a house, you never get the bonus.
The Lifetime ISA (https://www.boringmoney.co.uk/learn/investing-guides/product-guides/lifetime-isa/) removes some of these disadvantages: You can put in up to £4,000 a year, the government tops it up by 25%, with no limit to their contribution. Sure, you have to be under 40, but you can invest it in the stock market, which gives you a better chance of beating inflation. And if you choose not to buy a house, you can use it for your pension.
Take the handouts #2
Remember those wealthy baby boomers? They’re probably your parents. Remind them what a dutiful child you’ve been, and assure them you’ll choose their care home carefully. It may be worth dropping in the inheritance tax advantages of giving away their money earlier rather than later. None of this may work: If not, try emotional blackmail about how they’ve reaped the benefits of an improving economy, defined benefit pensions and free university education, while leaving the next generation destitute.
Take the handouts #3
Work your employer. Anna Sofat of Addidi suggests looking at workplace save-as-you-earn schemes as a way to save for your first deposit. This is only offered by certain employers, but is a way for employees to own shares in their company. They usually have to be held for three years, but there is tax relief available and employers will usually put a floor under the share price, so people can’t lose money. She says: “It can be a bit concentrated, but you can take a judgment on your employer. If the share price goes up, you should get an uplift.”
Take the handouts #4
Remember that you don’t just have Help-to-buy and Lifetime ISAs. From April 2016, you’ve had both the personal savings allowance and dividend savings allowance.
Savers can now get £1000-worth of savings interest tax-free without even declaring it on their tax return (higher rate taxpayers only get £500 and additional rate taxpayers get £0). At current tax rates, that means that savers can hold around £100,000 in an account paying 1% without ever paying tax.
The new Dividend Allowance means investors won’t have to pay tax on the first £5,000 of their dividend income. If the income available on FTSE 100 companies currently averages 3.8% (source: Morningstar,1st Dec 16), investors can build up a pot of over £130,000 – more than enough for a decent deposit.
None of this will help you with the deep and thorny problem of how to get more actual money. Nevertheless, it should help you make the most of the money you’ve got.