How to save for your first home!
One of the most topical stories in the news is the cost of buying your first home, it’s difficult for millennials to get onto the housing ladder without the help of mum and dad, so I wanted to share my thoughts to get your feedback on what I think.
This is a national site so it’s impossible for me to be specific on purchase prices. If you live in a city where I expect the purchase price to be much higher, I hope you earn a premium for living in the city. If, unfortunately, you don’t earn a premium, consider buying outsides of the city and commuting in, or buying outside the city and letting the property until you decide you’ve had enough of the hustle and bustle of city life, at least you’ll be on the housing ladder.
- The average cost of a property in the UK for a first-time buyer is c. £210,000, according to the Halifax.
- The average income in the UK for a 25-year-old is c. £21,000, with a take home pay of around £1,485pm after tax.
Lets look at an example…
- If a couple is buying a house with a combined joint income of £42,000, the maximum loan, based on four times their income will be around £168,000. The actual amount will depend on the lender and the applicants credit score, but this is a reasonable assumption. This means the couple would need a deposit of £42,000 or 20% plus costs.
- There is no stamp duty charged to first time buyers up to £300,000 and legal fees and valuation fees are likely to cost around £1,000 combined, therefore £43,000 is the target savings for this couple.
- Working on the assumption that the ‘bank of mum and dad’ is not available, and there’s no other resources to call upon, we need to look at the regular savings route.
With £1,485 net income and using the governments LISA (Lifetime Individual Savings Account) how long it is likely to take to save £21,500 (half of the joint costs)?
- Each contribution to a LISA up to £4,000pa will attract a government bonus of 25%, or up to £1,000. If we ignore any interest earned, or investment growth, you would each need to contribute £17,200 (£17,200+25% bonus = £21,500) to save half of the deposit and costs, assuming you split it equally.
- If you were to save half of your take home pay of £1,485pm, or £742.50pm, it would take 23 months, or just under two-years to save for this deposit, you would each save £17,200 and the government would have provided a 25% bonus of £4,300 each.
Saving half of your income over 24 months is possible!
Now, saving half of your income is a challenge itself, I acknowledge that, but with good money management skills, it’s achievable, the alternative is to extend this period, giving yourself more time.
- I share my Bank Account System in my book The Money Plan, which explains that you should pay all your regular committed expenditure via direct debit or standing order, from your Bills Account, you should automate as much of your expenditure as possible. As a guide, your regular bills should be no more than 50% of your net take home pay, and your current rent should not exceed 50% of this amount, or 25% of your net take home pay.
- Two other payments from this account are your WAM (Walk About Money) or general spending money, which should not exceed 30% of your net take home pay and your savings and debt repayment money, which makes up the final 20%.
- These are successful long-term financial metrics, which will guide you well through your life, like a balanced nutrition and exercise program. But if you’re training for a triathlon, or sporting competition, you will need to adopt your regular program, for the competition period, and serious athletes would prepare 12-24 months in advance of a major competition. It’s not how they train and eat all the time, but they decide and consciously make a decision to achieve their outcome, in this case, to save for a house deposit.
- With the 50/30/20 plan, we have 20% already factored into savings, we need to find the remaining 30% to make it 50%, if we want it to take 24 months.
- Each person will make personal changes, based on their circumstances, all I would say is don’t go too lean with your WAM, you need to live, you can’t hold your breath for two years, it’s not realistic, perhaps reduce your WAM from 30% to 15% of your take home pay and find the remaining from your Bills Account, taking this from 50% to 35%.
- Remember, there are three things we can amend to improve our finances; increase our cash inflows – can you earn more money to make it easier, remember it’s only for two years. Reduce our cash outflows – this is what we’re reviewing above, but it’s important to ask yourself with each bill; do I need this? Do I want this? Can I get a similar experience for less? Folks you can go without subscription TV, Netflix and a new phone, for just two years! Lastly, can we improve our investment returns – using a LISA if you’re aged 18 to 40 is the best return on your money, giving you a whopping 25% boost, plus any interest earned is tax-free.
- If you maximise your LISA in a year, which you may easily do, look for high interest rate deposit accounts, Cash ISAs are less attractive now you receive the first £1,000 or £500 of interest in a year tax free. Because this is a two-year plan, you should avoid the stock market, it carries too many risks over this period.
The final thing to say is that before you even consider this journey, make sure you’re fighting fit, you wouldn’t start your triathlon training with a joint or muscular injury, just like you should ensure all your debts are repaid before you start saving and buy your first home, you’ll have enough financial commitments to pay when you move in, you don’t want any other debt around your neck.
I know this is not going to be an abundant period, it’s a time of maximum effort, but the more you can increase cash in and reduce cash out, you will accelerate your journey time. Stay focused on your prize, creates a vision board of your ideal purchase (within your budget!), and write out why this is so important to you, you may come to a folk in the road and you will need you to make a decision; do I go on holiday with my friends, or remain on track for the house purchase? Only you will be able to decide the right course of action for you.