Four good money habits to start in 2019
One of my favourite things about the New Year is writing out my resolutions and goals for the coming...
The cost of rent surpasses the cost of mortgage repayments in most parts of the country. So it is doubly frustrating for millennials wanting desperately to buy their own home. Trying to scrape together the £30,000+ deposit required to get a mortgage, has many millennials asking how am I meant to save when I’m spending all my money on rent?
While a daunting task, it’s not impossible. Here we take a look at different ways to save towards your deposit. Throughout the article we’ll use the example of saving £30,000 within 5 years.
‘The ache for a home lives in all of us, the safe place where we can go as we are and not be questioned.’ – Maya Angelou, American poet and civil rights activist
The Help to Buy ISA is basically a cash ISA with a government bonus.
The Help to Buy ISA has a restrictions: you can invest up to £200 a month and the account can only hold a total of £12,000, or 5 years worth of payments. When you go to buy your house, your solicitor can apply for the government bonus of 25%. If you saved the maximum £12,000 this would mean you have £15,000 towards your deposit in 5 years.
Unless you were saving alongside a partner who has also been putting £200 a month aside and has £15,000 – you’ll still be short the £30,000 deposit necessary. And remember, Help to Buy comes with property stipulations as the government bonus will only be available on purchases of up to £450,000 in London and up to £250,000 outside of London.
Additionally, you may be eligible for the Help to Buy Equity Loan scheme where the government lends you up to 20% of the cost of your newly built home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest. More information on the equity loan restrictions and eligibility is available on the government’s website.
Anyone aged between 18-39 can open a Lifetime ISA (LISA) which has a higher savings maximum of £4,000 a year (approximately £333 a month). The LISA is also matched with a 25% government bonus, with a maximum bonus of £1,000 per year, until the age of 50.
The LISA is offered as either cash or stocks and shares investing, so you can be earning interest if you go for cash or the potential for capital growth if you choose stocks and shares. However, even if you kept your savings in cash, in 5 years you’d have £20,000 saved with £5,000 government bonus. Leaving you much closer to the £30,000 deposit you need for your first home.
If you chose to invest your LISA, at £4,000 + £1,000 bonus annually, assuming an annual return of 7%, you could have £30,700 in 5 years. Target achieved. Thanks compounding interest. It’s important to note when investing in stocks and shares, some element of risk is involved and you may not get back the amount originally invested.
The LISA does come with a few stipulations too. It can be used as a deposit on home purchases up to £450,000 or for your retirement. If you withdraw money before age 60, other than to purchase your first home, you will pay a government withdrawal charge of 25%, which means you’ll get back less than you put in. For example, if you’d put in £10,000 and government adds £2,500 – you’ll only get £9,375 back. Read the full details here.
Additionally, the LISA can be used as a means of saving your retirement. For example, if you’re 25 and invest the maximum into your LISA every year for 25 years, assuming an annual return 7% you’d have £338,000 when you hit 50, compared to £142,000 in a cash LISA, earning 1%, over the same period.
A stocks and shares ISA is what we referred to way back in the beginning of our series when talking about investing in stocks, bonds and funds.
Although it doesn’t come with a government bonus, it may give you the flexibly you need depending on your circumstances. Maybe you like the idea of investing (not available with the Help to Buy cash ISA) but you still want access to the money (something the LISA takes away with its withdrawal fee). You may therefore consider investing towards your deposit and other future goals in an ‘original’ ISA.
Since you won’t receive a government bonus, you would need to save estimated £5,000 a year to reach the deposit amount in 5 years assuming the 7% annual return. Remember, investing does come with some element of risk and the value and income from investments can do down as well as up and are not guaranteed. This means you may get back less than you invested.
With this type of ISA, you can invest up to £20,000 a year, with the knowledge that you can easily withdraw any money that you may need in the interim. More information on how and where to invest your ISA for the future is available here.
Whether you’re opening a LISA or investing in stocks and shares, you’ll need to keep an eye on your account to ensure you’re getting the most from your money. If you’re going for a cash LISA, you may need to transfer between providers from time to time to ensure you’re getting the best deal. Likewise, if you choose stocks and shares, you should review and update your portfolio at least once a year as your investment priorities may change.
According to a study by reallymoving* ‘only 60% [of first time buyers] said they planned to secure a mortgage in principle in advance of making an offer on a property. Only 55% understood the true meaning of ‘exchange’ with a worrying 37% believing it’s the date they collect the keys and move in.’ Yikes!
While it may not be related to investing in funds, buying a house is an investment so we want you to be as prepared as possible for all the jargon thrown around. Instead of me trying to explain something a little out of my depth *ahem, not a homeowner* I suggest reading the ‘ultimate guide to buying your first home’ from reallymoving. It covers everything from conveyancing, to different types of mortgages, surveys and more.
*survey of 500 people who are planning on buying their property in the next 3 years, full report