Britons are saving £140 a week on average by staying at home. Here’s how to turn those savings into a house deposit in five years.
Although it may seem hard not being able to go to the pub or practise your usual hobbies, there may be some financial benefits to being in lockdown – particularly for people hoping to buy their first home.
Britons are saving on average £140 a week by not travelling or going out to socialise, according to calculations by stockbroker Hargreaves Lansdown. By prudently putting that money aside and continuing good savings habits after lockdown is lifted, aspiring homeowners could get on the housing ladder much faster than usual. Here’s how to do it.
Save, save, save
Squirreling away £140 per week would leave you with £1,120 at the end of eight weeks of lockdown. The savings are calculated based on figures from the Office for National Statistics (ONS), and assume you are saving money by not eating out, but spending 25% more on food, drink and utilities while at home.
You could continue to grow your nest egg if you carried on cutting down on some of your more expensive habits after lockdown ends; you could aim to save £50 a week, for example.
Choosing the right home for your money
If you put that money into a cash ISA paying 1.25%, it would take you just under seven years to save up £20,000 for a house deposit. By investing the money instead, you may be able to hit that target faster. Assuming you achieved returns of 5% a year on average, it would take around six years to save the money.
Free money towards your first home
Aspiring homeowners aged between 18 and 39 could open a Lifetime ISA (LISA) instead, and benefit from free money to put towards their house purchase. You can put in up to £4,000 a year and the Government will top up anything you contribute by 25% – so a maximum potential bonus of £1,000 a year.
By depositing your savings into a cash LISA, also paying 1.25%, you could get on the housing ladder in five years and six months. If you invested them in a stocks and shares LISA you would reach your goal in just under five years, assuming you achieved returns of 5% on your money.
But there are strict rules on when you can withdraw this money. If you access it for anything other than buying a first home or for retirement when you turn 60, you will incur a hefty penalty: all of the government bonuses clawed back, plus an extra 6.25%.
Top tips when saving for a first home
Hargreaves Lansdown’s Sarah Coles recommended that those starting out set up a direct debit to deposit a set amount each month into a regular investment or savings account. “This helps you do the right thing without trying,” she said. You can set up a regular investment for as little as £25 a month.
If you’re a first-time investor, knowing where to put your money can be hard. One option is to invest in funds, where a manager chooses which companies to invest in for you so you don’t have to pick stocks yourself. This also reduces your risk of losing money, because it’s spread across a number of different companies.
According to some forecasts, house prices could fall by 10% or more this year. “If this is the case, there may be some opportunities to take advantage of the dip in house prices once the lockdown restrictions have been relaxed,” said Miles Robinson of mortgage broker Trussle.
However, Lawrence Bowles of estate agency Savills warned that banks may be reluctant to offer mortgages to people with small cash deposits after the pandemic. He recommended trying to build up as large a deposit as possible in order to bring down mortgage repayments and make yourself seem like a safer bet to potential lenders.
[Source: telegraph.co.uk/property, 1 May 2020]
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