In 2014, it might be time to look at innovative ways of putting enough cash aside to get on the bottom rung of the housing ladder as the future of Help to Buy comes into the spotlight, as Nick Moules explains.
Since the housing crash, it has been well-publicised that first-time buyers (FTBs) have been frozen out of the housing market. The Help to Buy scheme has an uncertain future (before it has really started) and if evidence of a housing bubble grows, political pressure to cancel the scheme will be ramped up.
From a lender’s perspective, it’s a tough ask to support FTBs as they’re typically the riskiest part of the market without the incentives; loans are at a high loan to value (LTV) and they’re under regulatory pressure to reduce risk and balance their books.
But it’s worse for the would-be borrowers for several reasons:
- Savings accounts and ISAs are not keeping up with inflation or rising house prices.
- Rents are rising and so are house prices, so if you’re renting and looking to buy, you’ll pay more out while trying to save more, stretching affordability.
- The cost of living is rising. Utility bills are on the up (seemingly every month) and the rates they by rise far outweigh average wage rises, further contributing to the squeeze.
Based on price rise predictions from RICS, it still makes sense to buy as you’ll be able to avoid paying increased rent and own an asset..
What is risk?
If would-be FTBs are interested in getting out of the renting cycle and into a house, then they need to make their money grow faster.
Some people might consider opening yourself up to private renting for another five years as a risk because the cash is effectively dead and there is no asset at the end of it (based on the national average £750 a month this tots up to £45,000). Of course it’s considerably more in parts of London.
Peer-to-peer lending and the stock market are two possible alternatives.
Sites like Nutmeg will grow a wide investment portfolio tailored to individual risk appetites from as little as £1,000 with the aim of achieving life goals like wedding funds, university fees for offspring, and of course property deposits. It’s an affordable way for individuals without heaps of cash to build a nest in a way that might previously have been off-limits, both in terms of cost and the level of knowledge required to make a success of it.
Peer-to-peer and peer-to-business lending can also grow cash at a faster rate than savings accounts can.
If an individual lends at 10% and they pay 20% tax (wealthier lenders will pay more tax), they’re left with 8% net returns if all loans repay as they should. The predicted default rate among the top four platforms at the moment is around 2%, so a further deduction on 10% leaves an average rate of 7.8%.
This is how repayments might look over a 5 year period:
|Year||ISA paying 2.2%||P2P paying 8% (after deductions)|
|1||£10,000 + 2.2% = £10,220||£10,000 + 7.8% = £10,780|
|2||£10,220 + 2.2% = £10,444.84||£10,780 + 7.8% = £11,620.84|
|3||£10,444.84 + 2.2% = £10,674.63||£11,620.84 + 7.8% = £12,527.26|
|4||£10,674.63 + 2.2% = £10,909.47||£12,527.26 + 7.8% = £13,504.39|
|5||£10,909.47 + 2.2% = £11,149.48||£13,504.39 + 7.8% = £14,457.73|
It’s certainly worth considering for people who want their money to grow at a faster pace.