How to Save for Your First House With UK Prices at Record Highs

Since 2011 House prices in the UK have grown rapidly from just over £160,000 to an astonishing £254,000. This growth has been accelerated since late 2019 with property prices increasing over 10% over the last 12 months. This is particularly concerning when we consider the house to price earnings ratio, which is the number of years of an average salary it takes to purchase an average property. Back in 1991 this figure was around 3.5 times but over the last 30 years has risen to now almost 7 times. Obviously this is a huge issue when it comes to affordability, particularly for first home buyers.

For many people, the purchase of a first property is a major financial goal. The massive increase in working from home due to the coronavirus pandemic, has led many people to find their housing situations unsuitable, particularly for those who live in small properties or shared accommodation. 

We therefore have an unfortunate situation where property has never been as expensive as it is now, and yet the need for a suitable property has never been as important as it is now. In this article I want to cover some of the key issues to consider when it comes to saving for a property, particularly if you’re a first home buyer.

Play the long game

Firstly it's important to understand that buying a property, especially your first property, should be considered a long-term game. It’s easy to get carried away in a time of Instagram and reality TV property shows and the seemingly never-ending cycle of success that we see on social media. But the fact of the matter is that most people are not able to purchase their dream home in their early 20s.

There's a lot of content online that focuses on extreme frugality when it comes to saving for a first home deposit. It's often considered on these accounts reasonable to watch every penny, reduce lifestyle expenditure as much as possible, stop your hobbies, stop buying any clothes and stop eating out at restaurants in order to scrape together the minimum deposit for the minimum property you can afford.

I don't agree with this.

As much as purchasing a property is a reasonable financial objective and something that most people should aspire to do in their life, I don't believe that it is necessary to put the remainder of your life on hold in order to scrape together that first home deposit. The real estate industry does a fantastic job of inducing FOMO. There articles almost every day on the Daily Mail and the Guardian that tell us that property prices are always going to go up, how expensive they are, how much of a mortgage we're going to need to get on the property ladder, and generally just make us fearful that if we don't do it soon we might never be able to.

I'm here to tell you that you have plenty of time.

Yes, the likelihood is that the property market will continue to rise over the long term, but you are not powerless when it comes to taking steps to guard against these increases. There are many ways you can increase your wealth, increase your assets, and increase your income in a way that will make affording a property in the future much, much easier.

So the first recommendation I have for those looking to get on the property ladder is don't feel like you need to rush it. As long as you have a plan in place and you're using your funds and your money in a sensible way in order to increase your wealth, the property market will still be there when you're ready.

Match Your Location to Your Lifestyle

One of the biggest opportunities that we've been given over the last 2 years is location independence. So many of us have been given the opportunity to work from home, where perhaps the opportunity wasn't there before. Even if the company that you're currently working for isn't so keen on work from home options, there are many companies out there who have fully embraced remote working and all the benefits that it provides. The employment landscape is one that has changed for the significant better when it comes to choosing a property. 

We no longer have to take into consideration a commute when it comes to choosing where we want to live.

This is an absolute game changer. There's a huge difference between a 90-minute commute if you need to do it every single day of the week, and a 90-minute commute when you need to do it once a month. With this in mind I think it's more important than ever to really consider what it is you want from your day to day life, and what area of the country provides that lifestyle the best. I know many people who've always dreamed of countryside living with access to the outdoors, to walks, to peaks, to rivers, but haven't been able to make the move due to their commute. Many of these people have now been able to make the move, have retained their high salaries and now live in a house and an area that is much more suited to their lifestyle. This drastically improved their quality of life.

You can now greatly increase the search area when you're looking for a property to live in. We have a situation now where the suburbs and areas you may have been looking at over the last couple of years, may no longer really be the best options for you. I would encourage you to really think long and hard about what you want your life to look like, and then find an area that matches that, without placing such a high importance on how close it is to your place of work.

Don’t Save, Invest

From a practical standpoint, accumulating a deposit is getting more difficult. Inflation is the highest it’s been in over a decade, salaries are not rising at the same level, and interest rates on bank accounts are next to zero. It's because of this situation that investing to grow your house deposit is a more attractive, or necessary, option than it has ever been.

The Bank of England is projecting that inflation could rise to almost 6% in 2022. This means that you need to be increasing your house deposit by 6% each year just to keep it level with inflation. That doesn't take into account further increases in the housing market, which means that realistically you could be needing to generate double-digit increases in your deposit just to stand still. Obviously, saving into a bank account that is paying 0.15% interest is going to make this increasingly difficult.

Really the only alternative is to consider investing the money you're setting aside for your house deposit. This goes back to the first point of making your property purchase a long-term plan, because if you are considering investing you should only be doing that if you're prepared to continue your current housing situation for at least the next 3 to 5 years. Obviously the longer you're prepared to invest for, the greater the potential gains and the larger the potential deposit.

The other important point to keep in mind with this investment is that as your potential property purchase gets closer, you should look to reduce the level of risk in your portfolio. At a certain point, you will probably want to move it to cash altogether. Obviously you want to remain invested as long as possible, but it's also important to keep in mind short-term fluctuations that could throw a long-term spanner in your property purchase plans. 

Consider a Lifetime ISA

One of the best ways to save for a first home deposit is to consider utilising a Lifetime ISA. A Lifetime ISA allowance allows you to invest up to £4,000 per year with an additional £1,000 added from the government as a bonus. The bonus is added as a 25% top-up for any amount up to that £4,000 limit. This bonus is an absolute no-brainer as it represents a 25% return on your investment without needing to take any risk whatsoever.

You can invest this money into the share market or you can also hold it as a Cash ISA. As discussed earlier, if you're looking to invest or save over the longer term, putting the money into the stock market or a balanced portfolio is a way to generate additional compound growth on top of your own money, plus the government bonus.

It's important to keep in mind that the £4,000 or whatever you put into a Lifetime ISA counts towards your annual ISA limit of £20,000. So if you were to contribute before £4,000 in the current tax year you could only utilise £16,000 into a regular Stocks and Shares ISA or Cash ISA. Just like a regular ISA, a Lifetime ISA is completely tax-free, with any growth or income on your investments staying within your portfolio.

The added benefit of a Lifetime ISA is that you are able to withdraw the funds if you desperately need to. There is a 25% penalty so it's not something you would want to do, but if the circumstances really called for it you can have the funds back. 

Lastly if you eventually elect not to use the Lifetime ISA funds to purchase your first property, you can access them after age 60 without incurring the penalty. This can make a Lifetime ISA an attractive alternative option when it comes to saving for your retirement. 

Take Advantage of Renting

The final point I'd like to make is that there are many benefits to renting rather than buying a property. It's often considered in the UK to be somewhat of a failure if you don't own the place that you live, but actually from a financial standpoint often renting can be a much more attractive option.

Many people who are looking to purchase their first time will only consider initial costs such as the deposit, stamp duty, mortgage arrangement fees and cost to move in. But unfortunately the cost of owning a property doesn't stop there. Obviously you will continue to have your council tax and your utility bills, but on top of that you will now be responsible for any other costs that the property incurs. This could be regular ongoing maintenance; it could be replacement of broken fittings or equipment such as the boiler; and even just the need to renovate or redecorate through regular wear and tear. There’s no calling a landlord to come and fix any problems!

Renting also provides a huge level of flexibility when it comes to ensuring that the property you're in matches your lifestyle. For example, if you are given a job opportunity in a different country or another part of the UK, or decide to go travelling, you can easily break your lease and move wherever the opportunity lies. If you own the property that you live in there are many obstacles to this whether you elect to sell the property or rent it out. 

Similarly, if you decide that your current property no longer meets your needs, it's very easy to find something different and something more appropriate if you are renting. If an unexpected child comes along you can easily find a property to rent with another bedroom or some additional space, but again if you own the property it can be an expensive and time-consuming process to do this.

As with any financial decision, especially one as large as buying a house, it is really important to understand what's important to you in your life, what your long-term objectives are, and then making sure that your financial choices match those objectives.