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How to save money for a house


How to save money for a house

Many people hope one day to own their own home. But with the average house price in the UK standing at £233,000, buying a first home may seem a long way off.

In this article, I’ll suggest how the process may prove less daunting than many people think.

Most first-time buyers require a mortgage, which means they need to save for a deposit. The greater an individual’s deposit relative to the value of the house they are buying, the lower their mortgage interest rate is likely to be. Mortgage companies generally offer their best rates to home buyers who have a lower loan-to-value ratio, which is calculated by dividing the mortgage by the house price.

Which means we need to talk about saving for that deposit. And perhaps the most important thing to do when saving for a house is to make a start. By opening a savings account and setting up a direct debit, the process of buying a dream home has moved a step closer. In addition, for first-time buyers it is worth considering what help is available from the government.

Savings accounts and simple cost-cutting
Individuals who struggle to live within their means may find it useful to open a savings account and set up a direct debit to transfer a specific sum into it each month. If the transfer is always done on payday, it may remove the temptation to spend a salary in its entirety each month.

A number of banks now offer the opportunity to round up amounts spent on a debit card to the nearest £1, with the ‘loose change’ being automatically paid into a savings account. This may be a relatively painless means of saving money; over time, the small amounts may accumulate into a useful pot of money.

With there being a number of cashback sites, it may be possible to receive money for purchasing goods and services through their links. In addition, comparison sites give users the opportunity to cut costs through shopping around for a variety of monthly expenditures.

Government help for first-time buyers
A variety of products are available that could help to boost the amount first-time buyers save for a home. Among them is the Help to Buy ISA, which is a tax-free account that is held in cash. Just like the name says, a Help to Buy ISA combines your savings with help from the government to help you get closer to affording that home.

With this type of ISA, you can make an initial investment of up to £1,200 in the first month. The sum that you put in is then topped up by government help in the form of a 25% bonus. That means up to £300 of help in the first month and a total of up to £1,500 in the account. After that, as much as £200 can be invested each month, and the government tops this up by 25% as well. That means a maximum of £50 per month from the government, allowing you to increase the account by up to £250 per month. Not a bad deal! However, should withdrawals be made that are not used to pay for a first home, the government bonus will not be paid.

A Lifetime ISA may also be of interest to an individual looking to save for their first home. This also offers a 25% government bonus on amounts invested. However, the bonus is paid up to the maximum allowance of £4,000 per year, which can be made between ages 18 and 50. This means a government bonus of £1,000 per year is available, with all income and returns being tax-free. It is possible to invest the money in the stock market or hold it as cash. While investing in shares may be a higher-risk strategy versus having cash savings, it may also generate higher returns that increase the size of a potential deposit. With a Lifetime ISA, there is no penalty for withdrawing cash to pay for a first home. However, should withdrawals be made before age 60 for other reasons, they are subject to a 25% penalty charge.

With the government’s Help to Buy scheme, it is possible to purchase a newbuild property with only a 5% deposit. This is helping to make home ownership increasingly affordable for many first-time buyers. The government pays 20% of the purchase price through a loan that is interest-free for five years, which means a 75% mortgage is still required.

For first-time buyers who purchase a home for £300,000 or less, no stamp duty is payable. Although this reduces the cost of buying a home, there will still be solicitor’s fees and potentially fees levied by the mortgage company.

Home ownership: it may be an achievable goal
While saving up for a home may take many years, it is possible to reduce the time it takes through following a simple financial plan. By saving money each month using direct debits and other online tools, it may be possible to generate a surprisingly large deposit. And, with the government offering bonuses for people saving for their first home, as well as policies designed to make it easier for first-time buyers to get onto the property ladder, home ownership may be more accessible than many people realise.

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Motley Fool UK 2019

First published on The Motley Fool





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