22 May 2019

Dear Monzo, buying a house feels out of reach

Dear Monzo,

After our wedding this June, our saving goals will move to looking to buy a house. It’s something that’s always felt out of reach for us. But after the success of our wedding savings, we’ve been inspired to keep going!

My question is, where’s the best place to keep our savings? A Help to Buy ISA? A Lifetime ISA? Or somewhere else? We’re each looking to save £200 a month.

– Budgeting Hard, Leeds


Dear Budgeting Hard,

Congratulations on your wedding, not least affording it! I planned mine a couple of years ago, trying to keep it casual by hiring a warehouse space. Once we had committed, they told us it would cost £500 to decorate it with trees, and £600 for a string of twinkly lights. Oh and 20% VAT on top…

I could write a whole book on the way The Happiest Day of Your Life™ can quickly become a veiled threat to spend more and more money on neon signs and bread rolls, or risk being doomed to decades of bitter regret. But let’s talk about another mind-boggling expense: saving for a deposit on a house.

"You need an average salary of nearly £53,000 to afford a typical first-time buyer property on your own."

It’s so impressive that you and your partner managed to save successfully for your wedding. And it’s great that you’re inspired to keep on!

The reality these days is that it’s incredibly hard to buy a property on your own. Research from last year found that you need an average salary of nearly £53,000 to afford a typical first-time buyer property on your own in 20 major UK cities, including Leeds. Which means more and more couples are having to pool their finances, save as a pair, and thrash out all the details about how best to do it.

"More and more couples are having to pool their finances."

It sounds like you and your partner don’t shy away from having frank conversations about money. So whatever you’ve been doing, don’t stop! Money, how we feel about it and how we spend or save it is one of the most common issues that crops up in relationship counselling. And the best way to avoid that is to keep discussing it openly.

Now for the practical part.

Before you pick an account, you should first work out how much you need to save. You’ll only be able to borrow between two and five times your salary in a mortgage towards the cost of a property, but you can double that because you’re buying together. The difference between that sum and the cost of the property you want is how much you’ll need to find for a deposit.

Once you’ve worked out how much you want to save, the Help to Buy or Lifetime ISAs you mentioned are probably your best bets. They’re designed to encourage you to save money towards your first property purchase. You’ll get a small amount of interest from the bank, as well as the bigger benefit of a bonus from the government. They’ll give you 25% of your savings on top, if and when you use those savings to put a deposit on a home.

The exact account you choose depends on a few things, including the price of the property you want to buy, when you want to buy it, and how much you can save.

You should focus your savings into a Help to Buy ISA if the property costs no more than £250,000 (or £450,000 if you’re buying in London). Or you can use a Lifetime ISA if the property costs no more than £450,000 wherever you buy.

"The account you choose depends on the price of the property you want to buy, when you want to buy it, and how much you can save."

According to Zoopla, the average house price in Leeds is £216,480. So depending on how much you can borrow, you’re probably going to have to save at least £20,000 for a 10% deposit.

Don’t forget there are extra expenses when buying, including stamp duty, the tax you pay on properties you buy (though if you’re a first time buyer and the house costs less than £300,000 you’re exempt), fees for solicitors and surveys, mortgage arrangement fees, hiring a removal van etc.

"The average house price in Leeds is £216,480. So you’re probably going to have to save at least £20,000 for a 10% deposit."

Let’s look deeper at each account.

First, the Help to Buy ISA. As you’re buying with someone else, you can each get a Help to Buy ISA and double your bonus.

Help to Buy ISAs are also flexible, which means you can take your money out whenever you want without losing anything, though you won’t get the bonus unless you’re taking out the money to buy a property.

They also offer about 2% interest, which is as good a rate as you’ll get on most other normal savings accounts. So if you’re not totally sure if or when you’ll be able to buy, but you want to start saving and see if you can get there, a Help to Buy ISA could work particularly well for you. If in a few years you change your mind, you won’t have lost anything.

How much you can save into a Help to Buy ISA is limited to £200 a month (or £2,400 a year), meaning you can get a maximum bonus of £50 a month (or £600 a year) on top.

Given that you and your partner are looking to save £200 a month each anyway, this could work well if you each open your own ISA. But if you want to ramp up your savings in the future, it means you won’t be able to pay in more than that.

"The Help to Buy ISA has been criticised because you don’t actually get the bonus until you’ve completed on your property purchase."

But just be careful: the Help to Buy ISA has been criticised because you don’t actually get the bonus until you’ve completed on your property purchase.

When you’re buying a house, you need to put down a deposit (usually about 5% of the cost of the property) when you exchange contracts (which is the step before you complete on the sale). Because you don’t get the bonus until you’ve completed, you can’t rely on it to make up the deposit. Some solicitors have told me you could try explaining that you’ve got money coming in from a Help to Buy ISA bonus, and negotiate on the size of the deposit you put down when you exchange contracts. But you probably don’t want to rely on this too much!

"The big benefit of the Lifetime ISA is that you get the bonus when you exchange on your house."

The big benefit of the Lifetime ISA is that you get the bonus when you exchange on your house. It’s also more generous than the Help to Buy account.

You can save up to £4,000 a year, meaning you could pay in up to £333 a month each if you wanted (although unlike the Help to Buy ISA you’re not even restricted to saving monthly). You can get up to a £1,000 a year bonus on top, and you can use it to buy a house worth £450,000 anywhere in the country.

You have to be under 40 to open the account. And you’ll also have to wait longer before you can use a Lifetime ISA to buy a house – at least 12 months from opening the account. Although it sounds like you’re planning to save solidly and gradually over time, so this shouldn’t really matter.

Lifetime ISAs aren’t flexible, which means you’ll be penalised if you want to take out your money without using it to buy a property. You’ll lose the bonus, interest, and some of your savings too. The only exception is if you use a Lifetime ISA like a pension, then you can get the bonus when you turn 60.

I think the best option for you and your partner at the moment is a Help to Buy ISA. Open one each and save the maximum £200 a month.

Just be mindful that the government is going to withdraw the Help to Buy ISA in November. You can open one any time until then, which should give you enough time after your wedding in June! And you can continue saving into it until 2029, as long as you claim your bonus before 1st December 2030.

Wishing you a very happy future of mutual budgeting together!

— Laura



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Email Laura at [email protected] and explain what you’re struggling with. She’ll choose one of your letters every month and we’ll publish it anonymously, along with her answer.

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