Over the past year, first-time buyers have been finding it increasingly difficult to get on the property ladder due to runaway house prices. According to one recent report, house prices have risen to more than five times the annual salary of the average first-time buyer. In addition, a 20% deposit on a home now equates to 110% of the pre-tax income of a typical employee.
So, in the face of surging house prices and increasing difficulty in saving for a deposit, what can first-time buyers do? Sarah Coles, senior personal finance analyst at Hargreaves Lansdown shares some helpful advice.
How has the pandemic affected saving for a deposit?
Recent research shows that nearly three in five first-time buyers (58%) in the UK who have purchased a home since March 2020 had to put down a larger deposit than planned due to the impact of Covid-19.
The average increase was an additional £22,849, bringing the average deposit size up to £62,572.
According to the stats, it took an average of 4.6 years for the average first-time buyer who bought a house during the pandemic to save enough money for a deposit.
How have first-time buyers been coping?
One of the ways that first-time buyers have been coping with the challenge of saving for a deposit is by asking for help from friends and family. In 2019/20, the stats show that a third of first-time buyers were helped in this way.
According to Sarah Coles, assistance from friends and family “can give you a vital leg up when you’re climbing the savings mountain.”
Grandparents can also come in handy for buyers whose parents are not in a position to help. Getting help from grandparents actually comes with the added benefit of potentially reducing inheritance tax bills.
For example, grandparents can give gifts of any amount and as long as they live for another seven years after giving the gift, it will not be counted as part of their estate for tax purposes. This is known as a potentially exempt transfer (PET).
What else can first-time buyers do?
If nobody in your family is in a position to gift you money, there are other things you can do.
1. Open a Lifetime ISA
If you are a first-time buyer and between the ages of 18 and 39, you can open a Lifetime ISA (LISA) to speed up the process of saving for a deposit.
You can put up to £4,000 a year into a LISA and the government will give you a bonus of 25%. That’s up to £1,000 of free money from the government to use towards the purchase of a home.
You can open a LISA with a bank or building society, or with an investing solutions platform that offers the product, such as Nutmeg.
2. Take out a Help to Buy loan
With a Help to Buy loan, the government will lend you up to 20% of the cost of a property (40% in London). You will only need to come up with a 5% deposit and take out a mortgage for the rest. The loan is interest free for the first five years. It has to be paid off after 25 years or whenever you sell the property, whichever happens first.
3. Ask family members to help without spending
There are ways family members with savings can help without gifting you the money. One way they can help without immediate financial commitment is by being guarantors on your mortgage.
Alternatively, you can go for a specialist mortgage such as those where parents put up a 10% deposit as a loan. If you meet all mortgage repayments in full and on time for a set number of years, your parents get back their money plus any interest due.
Another option is an offset mortgage. This is where a family member puts savings into an account that is linked to the mortgage. These savings are offset against the loan, and this can be used to reduce either the term of your mortgage or your monthly payments.
It has never been harder for first-time buyers to get onto the property ladder than it is now. If you’re currently saving for your first home, don’t despair. You’re certainly not alone and there are options out there to help you move forward.
Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.