Helping next generation home owners
Owning a property is top priority for 25% of adults under 40* - overtaking marriage, children and career ambitions. Yet first-time buyers need to save for over 20 years** to be able to afford a typical deposit for their first home!
Fast forward a decade or so and these statistics are likely to be even higher for today’s toddlers who will be keen to get onto the property ladder. To help parents give their children a ‘leg-up’ in the future, we have come up with some tips on how to build that much-needed nest egg and where it could be saved.
We have also put together an ISA guide which includes a helpful decision tree to help you see which one might be right for you.
Avoid invisible spends
If there’s nothing left in the pot at the end of the month to commit to savings, review your outgoings and see what can be cut-back to free-up some cash. There are many everyday ‘invisible spends’ that consume our cash; coffees, smoothies, bottled water, sandwiches, lunchtime and after-work snacks, take-aways. Spending £2.50 per day, Monday to Friday, on a coffee alone will set you back an average of £12.50 per week/£50 per month/£600 per year. Saving this over 15 years gives you £9,000 before any interest or fund growth.
Keep on top of financial admin
We’re all told to switch energy-providers, check and review supplier deals, swap to cheaper brands in the weekly shop, learn DIY on YouTube and spend less on trades people, cut-up store cards and end little-used subscriptions and memberships, but how many of us actually keep on top of our financial admin? If you have any form of discount package with a supplier, check its end date and re-negotiate the package. Concentrating on the detail could save you hundreds of pounds a year.
Receive instead of give
They say ‘it’s better to give than to receive’, but when it comes to interest it should be the other way round. Why give, or pay, additional interest to your bank or credit card provider when you don’t need to? Move your account to one that offers an interest-free overdraft and switch debts to a 0% balance transfer card. And receive additional interest from current accounts that top-up your balance every month. Inertia means many of us stay where we are and miss out on these additional payments, yet a £10 a month interest top-up gives your nest-egg a £120 a year boost. In a savings plan for 15 years this will be £1,800 before any interest or fund growth.
Re-direct child benefit
A family with two children receive nearly £1,800 in child benefit a year. While for many this allowance is vital in keeping families financially afloat, could a small proportion be re-directed elsewhere? Putting half of the £20.70 weekly first child allowance away each month could net you just over £41 a month/ £492 a year. Over 15 years this totals £7,380 before interest/fund growth or benefit changes are included.
Keep it simple
Start saving as soon as you can – it doesn’t have to be a lot – it’s more about making a financial commitment. Why not save £10 a month in the first year and increase this by £2 yearly, so in year two, £12 a month and year three, £14? If you save from when the baby’s born to when your child’s 21, you’ll have £7,500 set aside, before any interest or growth.
Where to save? ISAs are a good place to start to watch your nest-egg grow. The ISA limit is now £20,000 per year (more than enough for most families) and this can be split between Cash and Stocks & Shares ISAs. Any growth you achieve is free of tax and you can usually cash them in when you want to.
Cash ISAs don’t tend to fall in value so they are good for short term savings. However, interest rates tend to be low and over a longer period they won’t keep up with inflation. They’re handy if you need to access the money, perhaps as an emergency fund. Pick the best rate available and set a reminder every year to switch to a more competitive interest rate.
Stocks & Shares/Investment ISAs
Stocks & Shares, also known as Investment ISAs, have the potential to grow more, but over the short term they can fluctuate in value and if you need to cash in when markets are low, you might get back less than you put in. So only use these if you’re able to invest for the long term and you can hold your nerve along the way. If you are daunted by the thought of stocks and shares remember you can get ISAs, such as the Lemonade ISA, where experts monitor the investments for you and you can choose the level of risk you are comfortable with.
From April 2017, the Junior ISA tax-free limit is £4,128. The account is opened and managed by you but transfers to your child at 18. If you do not want your child to have automatic access at this age, it may not be suitable for you.
Help to Buy ISA
When your child is ready to jump on the housing ladder, you could gift £1,200 as a deposit into a Help to Buy ISA? Open to first-time-buyers aged 18 or over, your child can put in up to £200 a month and for every £200 saved, the Government will add 25% - up to a maximum bonus of £3,000. The minimum investment to qualify for the bonus is £1,600 and the maximum is £12,000. The Government bonus, however, can only be applied at completion, by the solicitor, as the final part of the property purchase payment. It cannot be used to help fund a property deposit. As this is a cash-based ISA it can only be held in conjunction with a Stocks & Shares ISA.
Available to those aged between 18 and 39 from 6 April 2017, it’s designed to help under 40s purchase their first home or save for retirement. For every £4 saved the Government will add £1 (worth up to £1,000 a year) payable at the end of the 2017/2018 tax year. After this the bonus will be paid monthly, up until the saver is 50. A maximum of £4,000 a year savings are eligible for the 25% top-up and funds must be used for a house purchase or held until the saver is 60. If they’re used for anything else, there’s a 25% penalty, which not only loses you the bonus, but it could reduce your overall savings too. A Lifetime ISA can either be cash or stocks & shares based.
With so many ISAs now available, choosing the right savings platform can be daunting. So to make things easier, check out our ISA guide to help you see which one might be right for you.
*According to the Yorkshire Building Society
** According to think-tank the Resolution Foundation