We all know the picture looks bleak for home ownership in a landscape of rising house prices, faltering wage increases and tough mortgage terms and conditions.
Despite this the desire to own your own home remains strong amongst young people with half saying this is one of their key economic goals for the next ten years.
The price of an average house in the UK is currently £226,234 according to HM Land Registry, and whilst 95% mortgages are available, the terms on a loan-to-value (LTV) of 75% are often much more favourable.
Taking this as a guide for an average would-be home buyer, this means in the region of £56,558 (25% of the average house price) is needed to put down as a deposit on an average priced property.
If you’re thinking about helping your (grand)children out financially make sure you’re aware of all the tax implications.
To put this in perspective, in 1970, when many current parents/grandparents may have been buying their first house, the average house price was just £4,975 (or £76,321 in today’s money). At the same LTV of 75%, they would have needed a deposit of £1,243.75 (or £19,068 in today’s money).
Today the average salary is somewhere in the region of £25,000 or in other words less than half the deposit needed on an average house. Using these figures it would take nearly three years to save a deposit in the impossible event you could save all your salary and not pay income tax.
In contrast the average salary in 1970 was £1664 meaning if you could save just one year’s salary in its entirety (again without paying tax) you would have enough for the deposit on an average priced house, and still have a few hundred quid left over.
You can see why it’s a much longer process these days to save up a deposit. This is where parents and grandparents can step-in. Gifting money to help younger relatives onto the property ladder is not only enormously helpful for them, but it can also be a tax efficient way of passing wealth down.
Are your (grand)children about to go to university? Check out our list of money must-haves you need to discuss before they go.
How to save up £56,558 for the kids
£56,558 is obviously a lot of money, so let’s break it down and look at how you can build a pot of money up for your child or grandchild.
Let’s assume you start saving from the moment a child is born, and assume that child will want to buy their first property at or around the age of 25yrs. This means you need to put aside £2,240 per year, and that doesn’t even take into account the possible growth through interest payments or capital growth.
And even if you don’t start saving until the child is a lot older, say 15, that still gives you ten years to put aside roughly £5,655 per year and still achieve the same goal.
Suddenly helping loved ones put together a deposit seems far more realistic.
If these figures are still too high for you to even contemplate, or you have multiple (grand)children to help out, bear in mind that anything you can afford to put aside will all go towards helping to buy a first property that bit sooner. And when you’re desperate to start putting down some roots by settling in your own home, a contribution which helps make this achievable a year, month, or even just a week sooner will no doubt be very welcome.
So what is the best way to get this money together? How can you minimise the burden through things like tax relief, and where do you keep the pot of money whilst you’re building it up?
Build and grow savings tax efficiently
Junior ISAs and a Bare Trust are two tax efficient ways to save money for (grand)children.
A JISA works just like a normal ISA and has an annual limit of £4368 (2019-20 tax year). No tax is payable on the interest earned by cash held in a cash JISA or on capital growth in a stocks and shares JISA.
It’s worth noting that only a parent or legal guardian can open an JISA for a child, but grandparents can pay into it, as long as the total amount deposited is not more than the annual limit. Also note a Child Trust Fund cannot be held at the same time as a JISA. So, if you want to open a JISA you must first close any existing Child Trust Fund and transfer money to the new account.
Similar terms apply to a Bare Trust, the main difference being that this is taxable, but only at the rate payable by the child. The advantage of a Bare Trust and a JISA is that there is no limit on how much can be deposited and any assets (capital) are held in trust until the child reaches 18 – meaning they can’t just divest it all and run away! Also, anyone can open a Bare Trust for a child, not just parents or legal guardians.
Help to buy a home for just £2240 per year
Whatever you decide to do the good news is that any help you can offer will be well worth it. Whether it’s going the whole way to helping them to save for a deposit by putting aside £2240 a year for 25yrs, or just buying them a set of mugs when they move in, it all counts!
Find out more about the benefits of being an early bird saver.
If you’re interested in finding out more about saving and investing check out our new magazine ‘Fixed’ which has loads of tips and hints about how to save cash.