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How renters could save towards a house deposit

A new government-backed savings scheme has been designed to make it easier for young people to take their first steps onto the property ladder.

A young couple moving in to their first home with boxes

The Lifetime ISA was launched in April 2017 and is aimed at those under the age of 40. As pretty much anyone in their twenties or thirties knows, it has become almost impossible to buy a first home without some form of outside financial help. This is one problem the Lifetime ISA has been introduced to help address.

Since the financial crisis of 2007-08, young people’s earnings in the UK have grown at a considerably slower rate than house prices. This has made it increasingly difficult for the under-40s to move on from renting or living with relatives.

The rise in rent

For those in rented accommodation in particular, this is a big problem. For a start, no one really likes paying their landlords hundreds of pounds each month with nothing tangible to show for it. At the same time, average monthly rents are on the rise. So while it’s never been easy for renters to find a significant amount of spare cash to put aside towards a deposit on a home of their own, the situation is just getting worse.

Rent has doubled over the last 10 years. Recent research from Landbay*, has found that the typical cost of renting a house or flat in England rose by 0.64 per cent in the 12 months to April 2018, and now stands at over £1,200 a month.

Costs have risen much more sharply in some parts of the country than in others, the Landbay report showed. In Leicester, for example, typical rents have gone up by more than 3 per cent over the course of the year, while above-average increases were also recorded in Nottingham (2.96 per cent) and Northamptonshire (2.44 per cent).

According to the firm, these parts of the East Midlands, along with the South-west of England – in particular the likes of Bristol and Bath – had been leading the way in terms of rent rises over recent months.

So how can the Lifetime ISA help overcome these obstacles? The scheme, like other ISAs, allows individuals to put money into cash deposit accounts, shares or investment funds with any returns being tax efficient.

How is a Lifetime ISA different?

But Lifetime ISAs differ from standard cash or stocks-and-shares ISAs in two key ways. Firstly, they are available only to people aged between 18 and 39. Secondly, money put into a Lifetime ISA is eligible for a government top-up worth 25 per cent of the total amount saved each year. The annual Lifetime ISA investment limit is £4,000, so Lifetime ISA customers could potentially get an additional £1,000 a year.

The government’s aim in paying this bonus is that the money in the ISA is eventually used either as part of a deposit on a first home, or withdrawn after the holder turns 60 as a supplement to their pension income. Withdrawals made before the age of 60 for purposes other than a deposit on a first home are subject to a 25 per cent government withdrawal charge. This means savers could get back less than they invested.

Cash or stocks & shares

For would-be first-time buyers, the Lifetime ISA is well worth considering given the tax-efficient returns and extra government bonus it offers. These tax advantages do depend on individual circumstances and may change in the future. But for anyone opening a Lifetime ISA, one significant decision concerns whether to put the money into a cash deposit account or invest in the likes of shares and investment funds.

Cash is less risky, but at present interest rates are near historic lows. This is problematic when considering inflation. When the cost of living increases over time, the amount you have saved probably won’t buy as much in the future as it could now.

Stock-market linked investments, on the other hand, carry more risk – their value can fall as well as rise. But they also have greater growth potential for those who are planning to save over a period of around five years or more.

While past performance is no guarantee of future returns, research by Schroders suggests that money put into cash ISAs over the past two decades has grown slower than stocks-and-shares ISAs over the same timeframe**. For renters who expect to have to save up their deposit over a relatively long period, therefore, the Lifetime ISA investment option could be well worth a look.

Written by Chris Torney – Financial Journalist


Sources: *https://rentcheck.landbay.co.uk/reports/uk-rental-index-report-april-2018/