The Daily Telegraph - Saturday - Money
With £2k saved, can we buy in five years?
Despite house prices continuing to climb, Britain remains a country obsessed with home ownership. Among many potential buyers are Joseph Burrows, who works in public relations, and his girlfriend Rhianna Bowe, who is in marketing, both 24.
The pair, who live and work near Leeds, have recently started saving to buy a home. To start, they took part in a saving challenge from Leeds Building Society, which gave them tips on how to budget and save.
Mr Burrows and Ms Bowe have a joint annual income of £40,000 and around £2,000 in cash savings, which is in an account that earns only 0.05pc interest. They live with Mr Burrows’s parents, paying rent of £220 each a month, including all their bills. Jointly they aim to save £450 a month.
They want to buy in the Leeds area, where the average house price is around £190,000 and a starter flat costs £130,000, but have no specific time frame in mind.
So where should they put their money to get the quickest returns, and how long before they can buy? Before they have a mortgage accepted, providers will want to scrutinise their spending, including the normal credit checks and any regular committed spending.
This identifies how much money you can reasonably commit towards paying your mortgage and how you might absorb interest rate changes. Application of these criteria between providers can vary tremendously, as can the attitude of the lender towards lending funds to those with smaller deposits.
Although there are a handful of lenders offering 95pc loans, typically a minimum 10pc deposit will be required. However, in this case Mr Burrows and Ms Bowe may need more since having student loans will increase their “committed expenditure”, which will reduce the maximum amount a lender may offer. A higher deposit will also give them access to better mortgage deals.
I would suggest putting aside a further £2,500 to cover mortgage application fees, survey reports and legal fees. At a house price of £130,000 the couple would be liable for stamp duty, although this would be minimal – around £100. Once they have the property they will need to furnish it and possibly buy carpets and curtains. These costs should not be ignored as they can be significant.
All in all, Mr Burrows and Ms Bowe are looking at just under £16,000 as a minimum (plus furnishings) based on this purchase price. Given that they have minimal regular financial commitments, it will depend how motivated they are as to how quickly they can save.
The couple do have time to “spring clean” their finances before presenting them to a lender for scrutiny, so they ought to analyse how they are spending. They can make the necessary changes to their lifestyle so that their bank statements look as positive as possible when they make their mortgage application.
If the couple plan to purchase in the next five years, it isn’t appropriate to consider anything other than cash savings. The investment risk is too significant for short time periods and, importantly, they do not have the capacity for loss at this stage.
A cash Lifetime Isa would be a great savings option. With the money they already have, if they could stretch to save £5,500 from their income before April 2018, they could have almost £10,000 in two Lifetime Isas by the end of this tax year and be more than halfway towards their goal. If they can continue saving at the same rate each month they should be in a position to buy in about 14 months’ time.
Providers of cash Lifetime Isas are unfortunately very limited but the one on offer from Skipton Building Society might be worth consideration. It pays 0.5pc interest.
Even if the interest rate is low at The starting point for Mr Burrows and Ms Bowe is to look at the property market in and around Leeds and have an understanding of prices. With their earnings it might be that they can only get a mortgage of between £100,000 and £140,000 and they should use this as a guide.
Saving a deposit of 10pc of the property price should enable them to get a competitive mortgage deal. However, there are many lenders that will offer mortgages to those with a 5pc deposit, albeit at higher interest rates.
They could also consider the Help to Buy schemes offered by the Government. There is a sharedownership option, where they buy a share of a home and pay rent on the rest, or an “equity loan” scheme, where they need a 5pc deposit to buy a newbuild home, can borrow up to 20pc from the Government and then get a mortgage for the rest.
They need to be able to afford the ongoing mortgage repayments and their living costs. These costs will be considerably more than they are paying now in rent to Mr Burrows’s parents. They should also consider the potential impact of interest rates rising, which they must surely do at some point.
Mr Burrows and Ms Bowe should review their day-to-day income and expenditure and be realistic about how much money they can save each month. If they know the size of the deposit they are aiming to achieve, they should then have a good idea about how long it will take to save.
It is good that they have some cash savings, although this is in an account earning much less than the rate of inflation, so the spending power of their money is actually falling in real terms.
They are looking at Lifetime Isas and this could be a very good choice. They are able to save up to £4,000 each per year into a Lifetime Isa and will receive a government bonus of 25pc on the amount they save. This bonus can provide a big boost to their mortgage deposit savings. Lifetime Isa savings can be accessed tax-free if the money is used toward purchasing a first home or from the age of 60.
If they are aiming to raise a mortgage deposit of £20,000, and assuming they use a Lifetime Isa and earn interest of 1pc a year on the account, it will take them around six years if they’re able to save £200 a month between them.
However, if they are able to boost their saving to £400 a month they can hit this target in just three years.
Over these time frames they should probably stick with using cash Lifetime Isas. If they use a stocks and shares Lifetime Isa it could set back their plans if the stock market fell just before they wanted to buy a property.
They should, however, consider a stocks and shares Lifetime Isa if they cannot afford to save £200 each month and so will be saving for longer.
Getting on the housing ladder is many young people’s dream. How long will it take this couple to save, asks Sam Meadows ‘If they are able to save £400 a month they can hit this target in three years’