It has never been so difficult to save for a deposit: what can you do?
Sarah Coles, personal finance analyst at Hargreaves Lansdown, comments on the Nationwide special report on first-time buyer affordability, showing it’s never been so difficult to save for a deposit.
Key points from report:
- Deposits are less affordable than ever for first time buyers: 20% is 110% of average income.
- This autumn, the first-time-buyer price-to-earnings ratio hit a new high of 5.5 (the previous high was just before the financial crisis in 2008, and the long-run average is 3.8).
- In 2019/20 a third of first-time-buyers had help from friends or family.
- This reflects our findings that three quarters of young people (74% of those aged 25-44) say it’s harder for them to get onto the property ladder than for previous generations (Figures from a survey of 2,000 people by Opinium for HL in September 2021).
Sarah Coles says:
“It doesn’t matter how many lattes or smashed avocadoes you sacrifice, getting on the property ladder is unspeakably difficult. First time buyers have to save a record multiple of their salary to buy a property, and face carrying a debt of five and a half times their salary. It’s no wonder so many are forced to ask for help from their parents. Fortunately, even if your family can’t spare the huge sums required for a deposit, you may still be able to get help.
“If your parents are able to help out, don’t rule out asking them. It can give you a vital leg up when you’re climbing the savings mountain. If they’re not in a position to give you such a big sum of cash, don’t rule out asking grandparents. If they risk busting the inheritance tax limits it can even help reduce their estate, and protect them from an inheritance tax bill.
“They can give gifts of up to £3,000 a year, which will leave their estate for inheritance tax purposes immediately. They can also give gifts of any size, and as long as they live for another seven years after giving the gift, this isn’t counted as part of the estate for inheritance tax purposes either.
“Even if nobody in your family can help you financially, there are still ways to get help.”
Three more ways to get help:
1. Open a LISA
Buyers aged 18-39 can put up to £4,000 a year into a LISA, and the government will add a 25% bonus on contributions each month: that’s up to £1,000 of free money from the government each year. To qualify you will need to be a first time buyer, hold the LISA for at least a year, and buy a property worth no more than £450,000.
2. You could consider a help to buy loan
This is a government scheme that runs until March 2023, and is available to first-time buyers moving into new-build property. The government will lend you up to 20% of the cost of the property, so you only need a deposit of 5% and a mortgage for 75% of the cost. However, you need to be aware of the costs involved, which can be substantial. The government loan is free for the first five years. After that you will pay a loan fee – which rises each year.
You will also have to repay the government loan after 25 years or whenever you sell the property – whichever is sooner. And here’s where a big chunk of the costs come in, because the amount you repay is based on the percentage of the property price you initially borrowed. If, for example, you borrowed 20% on a £200,000 property, you’ll have borrowed £40,000. If price rises over the next decade take the property value to £500,000, you’ll owe 20% of that – which is £100,000.
3. Or you could ask your parents to help in a way that doesn’t require them to give you any money
This could include being a guarantor on the mortgage – although they’ll need to have plans in place for how the mortgage would be paid if you couldn’t make a payment. A more attractive alternative might include a specialist mortgage. You can, for example, get a mortgage where a parent provides a 10% deposit as a loan. If their offspring meets all the mortgage payments in full and on time for the first three years, their parents get the loan back in full – with interest.
Alternatively, you can use a family offset mortgage, which allows other family members to put savings into an account that’s linked to the mortgage. The savings are offset against the loan, which can be used either to reduce interest payments or shorten the length of the loan. This offers more flexibility for parents, and doesn’t leave them open to a liability if their offspring can’t pay the mortgage.
Kindly shared by Hargreaves Lansdown
Main photo courtesy of Pixabay
