20 Feb Property ladder
If you are a parent like me you might be concerned about your children’s prospects of making it onto the property ladder. It’s widely reported that due to consistent property price inflation over the last 20 years, most young people will find it extremely tough to buy their first home. So what can they, or you, do to make the goal of property ownership more attainable?
I have previously written a blog about being the bank of mum and dad (https://financialjamming.com/a-helping-hand-financial-assistance-for-your-children/) but not everyone has the means to do this or is secure enough in their own circumstances to make a large gift to their children.
There’s the possibility that grandparents might be able to help and, from an estate planning perspective, an outright gift from them can make sense as it bypasses a generation and as long as the donor lives seven years it is then out of their estate. But with the potential for rising care costs and their own financial security to consider, again not everyone in a position to do this.
Assuming that financial assistance from an older generation isn’t possible and the ability to gift or loan a larger sum to purchase your children’s first property isn’t something you can confidently say will be a possibility at this stage based on your own financial plans, this is what can you do to help start now.
If your children are still young then the earlier you start saving on their behalf the better. I’m sure you’ve heard this before, but the benefit of compound returns over a long time can make a massive difference to any savings.
With interest rates currently so low, any money you set aside in a savings account is likely to go backwards in terms of purchasing power due to price inflation. This means that you should consider taking on some investment risk in order to receive a higher return than inflation. As I have said in previous blogs, risk and return are related and if you want to achieve a long term return greater than inflation you will need to accept some risk.
The easiest way to start saving for your children is using a junior ISA (JISA). You can currently subscribe up to £4,368 in this tax year. They are easy to set up and can be funded via a regular direct debit and/or topped up when funds allow, such as excess birthday or Christmas money that your children receive but don’t need to spend.
Lots of low cost JISAs are available online and most offer the ability to choose a range of index-tracking funds that enable the money to be invested in the stockmarket while keeping costs to a minimum.
There are of course alternatives available to JISAs but I would suggest these are considered first due to their favourable tax treatment and ease of use.
As your children get older, if you have been using JISAs (or child trust funds (CTFs) that were available before the JISA) then you, and they, have some decisions to make between ages 16 and 18.
At age 18 the JISA will become an adult ISA and your child can make their own decisions about what to do with the funds. This is where an element of help and education is worthwhile to assist them in making sensible decisions.
If the funds are not required for university education or other expenses, then they can be kept for a future house deposit. It can even be worth considering using student loans to help with university costs and retaining the JISA funds. The criteria for repayment of the loans and the flexibility of having the choice in the future of using the JISA funds to repay the loans or not can be useful. However careful consideration should be given to the interest accruing on the loans and to your child’s likely employment and financial situation after graduating.
At age 16 your child is eligible to open a cash adult ISA and can currently contribute up to £20,000 per tax year in addition to continuing to fund their JISAs. Although the rates of interest on cash ISAs are low and not great for long term investing, the ability to fund a cash ISA means that when they turn 18 the funds can be transferred into an adult investment ISA without contributing to their annual subscription limit. This means that more funds can be added to the adult ISA as up to £40,000 (two years’ subscriptions into the cash ISA) can be transferred to the new investment ISA in addition to its normal £20,000 maximum subscription and any existing JISA funds.
This could add a significant boost to any existing tax efficient savings and might mean that a future property deposit is more obtainable.
It may also be worth your children considering using up to £4,000 of their annual ISA subscription to fund a lifetime ISA (LISA). These are available at age 18 and receive an annual bonus from the government of up to £1,000. The funds in a LISA can only be used for the purchase of a person’s first home or accessed after age 60. It is therefore important to consider this lack of flexibility and ensure that the LISA criteria are appropriate.
Both LISAs or adult investment ISAs can be a good home for any additional savings after your children are aged 18 or can be funded from funds previously built up in JISAs.
Whatever you decide to save for your children, the best advice is to start early even if it is just a small amount. Then consider all the tax-efficient options available to them as they get older and especially at age 18. This may also help you reduce the length of time that they have to come back and live with you in the future!