Ways to save your house deposit in double-quick time
There’s a growing number of property investors whose first property purchase is a property investment. Increasingly we speak to young investors who want to live in a rented property while taking advantage of property investment opportunities. They want the flexibility of having the ability to live and work where they want, while simultaneously benefiting from the superior income and capital growth potential offered by an investment in property.
Property investment could produce retirement income that beats traditional retirement options into a cocked hat. With pension plans producing low returns, suffering from a lack of flexibility, and then offering limited income in retirement, property investment is the new retirement planning. The younger you start, the sooner you’ll be able to retire, as I discussed in my blog “You’re never too young to start in property investment”, in which I detailed of a young property investor who retired at 28 years old.
The difficulty that many young, first-time property investors have is saving the deposit for their first property – and how to do so is one of the most common questions we’re asked. Whether you want to invest in a property or buy your first home, here are some tips that will help you get that deposit together in double-quick time.
Saving for a property investment deposit requires some sacrifice
Whatever you’re saving for, unless you’ve got a big wedge of disposable income the probability is that you’ll need to forego a few ‘luxuries’. In my investment guide about how to save an investment property deposit quickly, you’ll read how to reduce your spending and save up to around £8,000 a year by taking measures like:
- Drinking instant coffee instead of splashing out on your daily dose of Starbucks or Costa
- Taking a packed lunch to work instead of buying a sandwich at the local café
- Buying food more wisely and wasting less
- Always using a list when shopping
- Giving yourself a ten-minute reflection period before committing to an impulse buy
These are the sort of money-saving ideas that Tony Fleming used on his way to investing in property and retiring at such a young age.
Earn more money
There are plenty of ways that you can increase your income, including:
- Doing more overtime
- Working a second job
- Moving to a job that pays more
- Increasing your rates if you’re self-employed
- Taking on more clients
- Start freelancing
Some investors I know have started trading at boot fairs, discovering a hobby they love and that makes them some extra cash.
Other people sell the stuff they no longer need or use: a great way to have a clear-out and make some extra money (as long as you don’t then go and buy more stuff with the cash you just made).
Pay off debt and then pay you first
When creating a savings regime, it’s best to get rid of your debt first. Start by paying down expensive debt: credit cards, store cards, and so on. Then get rid of personal loans, and finally those ‘interest-free’ buy now, pay later deals. There is no such thing as interest-free – if you’re a day late paying, you’ll be charged an extortionate rate of interest.
When you’ve become debt free, start paying yourself before anyone else. It will ensure that you save some money every payday. If you’ve stashed it away already, you can’t spend it, can you? It is why the government takes tax from you before you get your pay: it ensures they get their money. When it comes to paying yourself, act like the government and do so before giving any of your hard-earned cash to anyone else.
Save money by house sharing
Another strategy that was used by Tony Fleming on his way to becoming a property millionaire so young was house sharing. After he had moved out of his parents’ house, he bought a property and moved two of his friends into the spare rooms. The rent they paid was enough to cover his mortgage and some running costs, meaning he had more disposable cash to save.
How to save
Now that you’ve created extra disposable income, the way you save could make a big difference to how quickly you can raise your deposit. Here are the main options:
· A regular savings account
You could get a better rate of interest by saving a set amount every month. However, you might find that you’re restricted on when and how much you can withdraw. It can be a good thing, as it stops you from taking out cash for unnecessary impulse buys.
· Fixed term savings accounts
A fixed term savings account is ideal if you’ve saved up a reasonable amount, but it will be some time before you have enough for your deposit. A one or two-year fixed rate account will pay more than an instant access account.
· An ISA account
An ISA is an Individual Savings account, specially designed to offer tax benefits: all the interest on your savings is tax-free. With interest rates as low as they are today, and a personal allowance on savings interest of £1,000 before any tax is charged, a cash ISA is less valuable than it used to be.
However, a particular type of ISA is available for first-time buyers. The ‘Help to Buy’ ISA lets you save £1,000 to open the account and then £200 every month afterwards. You can save up to £12,000 in the Help to Buy ISA, and the beauty is that not only do you receive interest tax-free, you’ll also receive a 25% bonus from the government. If you save the full £12,000, you’ll come out with a bonus of £3,000 plus interest received.
If you are buying a home as a couple, you could both open a Help to Buy ISA and receive a combined bonus of £6,000. That’s free money you really should get your hands on.
A new type of ISA is proposed for April, especially for the under-40s. The Lifetime ISA (LISA) is similar to the Help to Buy ISA, except that it is designed for savings through to age 60 or when you buy a first home, whichever is the sooner. You can save £4,000 per year, every year, and receive a 25% bonus. The bonus is paid on deposits made until your 50th birthday.
If you open a LISA on your 18th birthday, you could receive £32,000 in bonuses.
There are some rules governing withdrawal, which include:
- The proceeds are paid tax-free provided they are used to buy the first property as a home or are withdrawn on or after your 60th birthday
- If you withdraw your funds otherwise, you will need to repay the bonuses paid to you
- The LISA must be open for at least a year
- You must buy a property with the help of a mortgage
- You can’t use as a deposit on a property that you intend to rent out as a buy-to-let investment
On this last point, HM Treasury has said that if your professional circumstances change after you’ve bought your home, you will be able to rent out the property.
A word of warning about investing your savings
I’ve had first-time property investors and home buyers tell me that they’re going to invest in the stock market to save their deposit. With such low savings rates, this could be tempting. After all, share prices can go up quickly. The trouble is, they can also fall very quickly – you could find your savings are worth less than when you put them into your investment account, and the loss could take a few years to make back.
For more ideas on saving a deposit for your first home or investment property, contact one of our team today on +44 (0)207 923 6100. It is possible for a couple to save almost £25,000 in less than a year.
Live with passion
Brett Alegre-Wood
