Simon Heawood, co-founder and CEO of Bricklane.com, the first online Property ISA, looks at what savings options are available to help you build up money for a deposit on your first home
Getting on the housing ladder has become about as challenging as catching a Southern Rail train on time, with many would be first-time buyers reluctantly accepting that they are going to be stuck waiting for quite some time.
It is a well-worn cliché that Britons are obsessed with owning property. It was often highlighted by the last government that 85% of people want to buy a home, which was a key area of policy focus. Despite this, we’re at the lowest level of homeownership since 1985, and 65% of young people now think they’ll be stuck renting forever.
A large proportion of those currently shut out of the market wouldn’t have any problem securing a mortgage, if only they could save for the deposit needed.
For first-time buyers, the average home is now over five times gross earnings across the UK and more than 10 times earnings in London, according to Nationwide. This means the UK average deposit for a first-time buyer is more than £34,000, with it reaching over £95,000 for those in London.
With roughly 50% of income being spent on rent, putting any money aside is difficult. On top of all this, house prices have been continuing to grow while people save, meaning the required deposit is growing further out of reach. It’s clear why so many young people are losing hope.
That said, all is not lost. There are a few solutions out there to bring down the amount you need to save, and a few that help you get to that amount sooner, both of which could boost people’s chances.
Bringing down the amount you need to save
Acknowledging the issues for first-time buyers, the last three governments have launched a variety of schemes aimed at either lowering the cost of new homes or contributing towards the cost of a deposit. Criticism of many of these schemes have been that they are limited to new homes, that they are only usable at the lowest entry point, and that they can neglect to help the large number of people who are on good salaries and yet are not able to afford their own home.
– Starter Homes
Starter Homes is a government sponsored scheme started by the Cameron government with the aim of helping first-time buyers onto the property ladder by providing discounts on new homes. Whilst it is yet to start, you can register interest online now and the scheme enables those using it to access a 20% discount on a new home.
There have been question marks over the reach for this scheme because the maximum cost of an eligible home will be £250,000 outside London and £450,000 inside London.
– Help to Buy loans
Rather than lowering the cost of a property, this government-sponsored scheme lowers the deposit needed for first homes. This has arguably been the most successful of the schemes launched in recent years, although is only available on new homes.
If buying through this scheme, the government lends you up to 20% of the cost of the home, leaving you only needing a cash deposit of 5% and a 75% mortgage to cover the shortfall.
Recognising the significant challenge of buying in London, the government loan is up to 40% for buyers in the capital. For the first five years of the loan there are no loan fees, buying you time to save up to repay the loan.
– Shared ownership
A halfway house between owning and renting, shared ownership gives you the chance to buy a share of between 25% and 75% of a home and pay rent on the remaining share.
Helpfully, the scheme has the flexibility to allow you to increase your share of ownership as and when you can afford it. It is available to households earning under £80,000 a year outside of London and under £90,000 in London, so long as you are a first-time buyer.
Saving to get there faster
For many the biggest challenge is saving for the deposit that will secure their first mortgage, whether buying independently or through one of the schemes above.
With interest rates having remained low for the best part of a decade, putting money aside has seen little return, unless you have the knowledge and time to invest your money sensibly.
Most people don’t have the time and inclination to become hardened investors themselves, they just want to know that the money they work so hard to put aside is generating a good return from a product they can understand and doesn’t require significant time to manage.
To help us save up for that deposit, both the government and private businesses have come up with a few alternative options that are designed to make it easy to receive better returns than Cash ISAs or savings accounts.
– Help to Buy ISAs
The Help to Buy ISA only became active in December 2015, but is already being phased out in favour of a new Lifetime ISA. The ISA was designed specifically for those looking to buy their first home and will see the government give savers a ‘bonus’ boost of 25% (up to £3,000) when buying a home worth up to £250,000 outside of London, or £450,000 in London.
– Lifetime ISAs
The Lifetime ISA is for people aged between 18 and 40. It is an enhanced version of the Help to Buy ISA, allowing you to save in both cash and invest in other ISA eligible products. The bonus is larger than the Help to Buy ISA, and you can receive it either when you buy your first home or at retirement (but this is a long way off for most would be first-time buyers).
The Lifetime ISA allows you to put in up to £4,000 a year, either as a lump sum or by topping it up throughout the year when you can, the state will then add a 25% bonus on the total you put in. It will launch in April 2017, though some large financial institutions have said they cannot be ready, since the scheme is complex to implement.
– Savings apps
For many the biggest barrier to saving is having the inclination to do so. There are a number of new apps that are designed to help you save without having to do anything more than sign up in the first place and let them put your money aside for you.
Products such as Plum (withplum.com), for example, run smart analysis on your spending patterns, and automatically put amounts aside that you can afford to save. This is a simple way to put money aside regularly, in a hassle free way that doesn’t adversely affect your lifestyle.
– Property ISA
We set up our Bricklane.com Property ISA specifically to help first-home savers with these issues and ease the frustration of working hard to put money aside, only to see themselves fall behind the property market while saving.
The Bricklane.com Property ISA allows anyone to invest in property in less than 10 minutes on their computer or smartphone, from £100. Over time, customers’ investments earn rental income, and track the prices of the properties owned. This means that first home savers can now keep pace with the housing market while they save. It is estimated that this can get a typical saver to that first home four years quicker than by saving with cash.
The current average rental yield generated is 3.5% net of all fees, costs and taxes, which is significantly above the interest rates offered by Cash ISAs, even before taking into account any changes in the price of property, which could boost the yield even further.
Investments are ISA eligible and use the Real Estate Investment Trust (REIT) structure, making it the most tax-efficient way to invest in UK residential property. As a further boost to first-home savers, from April this year, they will be able to invest through the government’s Lifetime ISA scheme, and access the government’s generous bonuses.
First-time buyers have a lot to think about, but the outlook doesn’t need to be as bleak as standing on a cold platform wondering if your train is going to arrive. There are options out there to help get that first mortgage, it is just a case of carefully working through them to see which best suit the individual’s circumstances.
Simon Heawood is co-founder and CEO of Bricklane.com, which is backed by Zoopla and offers the first online Property ISA. He is a renter himself and started the company in order to help savers buy their first home sooner rather than later.
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