How to avoid the bank of Mum and Dad

For many first time buyers the only way to get a foot on the property ladder is to borrow money from the good old bank of Mum and Dad. As many as 300,000 first time buyers will receive either gifts or loans from their parents in order to secure their first home this year and this is nothing new. For years the only way first time buyers have been able to join the property ladder is via the help and support of parents who are willing and able to contribute to the amount required as a deposit on a new property. In reality the bank of Mum and Dad is one of the top 10 biggest mortgage lenders in the country and this shows no sign of slowing anytime soon. Recent research has suggested that parents will contribute a staggering £5 billion this year alone to their home-buying children, working out to be an average of £17,500.00 in each case.  Whilst the numbers speak for themselves many worry that first-time buyers are not considering all the ‘other’ options which are already in place and at their disposal.

Nowadays there are in fact a number of different ways in which those looking to buy their first home can be supported; outside that of the bank of Mum and Dad. One such method is the relatively new tool; the Help to Buy ISA. Introduced about 5 months ago, this is a new government backed saving scheme which gives savers the ability to boost their deposit when it comes to purchasing their first property. This ISA is only available to first time buyers and gives the opportunity to ‘top up’ the amount which is saved prior to the purchase of the property being completed. The Help to Buy ISA is simple and easy to understand in how it works. Upon opening the ISA the individual is able to make an initial and one-off deposit of £1200.00. After such time monthly deposits of up to £200.00 can be made, each and every month until a total balance of £12,000.00 is reached. In simple terms for every £200.00 the government will contribute £50.00 meaning that the maximum amount of return would be an additional £3000.00 from the Government towards the deposit of your first home. So figuratively speaking the £3000.00 is therefore ‘free’ money. Any amount can be deducted from the ISA at any time but after the initial deposit; no more than £200.00 can be returned monthly. This means if you decided to withdraw £1000.00 a year in; you cannot put £1000.00 back as a lump sum.

The Help to Buy ISA is designed to support first time buyers in their quest to save for the deposit required for their first home and therefore has the specific rules in place to avoid the ability for individuals to simply ‘earn’ £3000.00 without specifically qualifying to do so. The Help to Buy ISA is only available to consumers who are purchasing their first home and not for those who are already on the property ladder. Equally the contribution from the Government is not in putted into the account and instead can be claimed at the point of purchasing the property, meaning that only the funds saved by the individual can be withdrawn by the individual at any given time. The other great news is that for joint first-time buyers, therefore couples, there is the option to both save via the means of a Help to Buy ISA and in return there is subsequently the ability to gain a contribution of £6000.00 in total; all of which is tax free thanks to the ISA format.

The Help to Buy ISA is proving to be one of the most popular supports offered by the government to date with about a dozen providers already offering the scheme including Barclays, Halifax and Santander. Early reports suggest that some individuals have already ‘cashed in’ via the scheme which was first introduced in December of last year and as such benefited to the sum of £400.00 in terms of the Government contribution. It will be interesting to see the positive effects this particular scheme will have for first time buyers as time continues to pass. This is particularly true for couples perhaps given the ability to double up on the overall amount that can be gained. These such schemes and any which follow them will help release some of the pressures felt by parents to support their offspring in their quest to join the property ladder. 

 

Representative Example: Representative 1286.98% APR on a loan of £300.00 with 5 monthly repayments of £101.03 Total amount repayable £505.13 Annual interest rate (fixed) 290%

Warning: Late repayment can cause you serious money problems - For help, go to moneyadviceservice.org.uk

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Author: Internal Customer Services Agent