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Guide to saving foryour first homeIn this special report, we reveal:

How to calculate the amount you need to save How much you should save each month The pros and cons of saving and investing

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Contents

3. Foreword4. How much do I need to save?7. How much should I regularly save?8. Investing and saving - the pros and

cons10. Options for savings and

investments12. Seven reasons to invest with

Hargreaves Lansdown13. Contact us

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Important Notes: All stock market investments can fall in value as well as rise, so investors could get back less than invested, and they should be regarded as long term investments. This guide is based on our understanding of the current tax rules and regulations. Whilst the tax benefits we refer to are those that currently apply, they can change over time and their value will depend on personal circumstances. This guide is written for those happy to make their own investment decisions, it is not personal advice. If you have any doubts about the suitability of an investment for your own circumstances, please seek expert advice. All information correct as at 10/03/2017.

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Foreword

Thank you for requesting our guide to saving for your first home. We hope you find the information in this report useful and it helps you reach your goal of purchasing your first home sooner.

Getting one foot on the property ladder is often considered one of the biggest milestones in a person’s life. Having keys to your own front door is a step up in independence and responsibility. However, making that first step is getting progressively more difficult as house prices have accelerated faster than wage growth in recent years.

As such, the so-called ‘Generation Rent’ (those unlikely to ever be able to afford to buy) is ever increasing. Renting overtook home ownership in 2004 for 21-25 year olds, and in 2011 for 26-30 year olds. Also, the number of young adults living with their parents has risen by 618,000 over the last 20 years to 3.3 million in 2015.

Nonetheless, with good planning, sensible saving and investing, the dream of home ownership could become a reality much sooner than you think.

In this guide, we highlight the key planning points you’ll need to consider, including:

● How much do I need to save?● How much should I save each

month?● What are the pros and cons of saving

and investing?● What are the best options when

saving and investing?

We hope this guide will help when planning to save for your first home and give you peace of mind knowing that you’ve got everything covered.

Danny CoxChartered Financial Planner

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How much do I need to save?

One of the first steps you will need to take is estimating how much to save. This process will probably involve researching house prices in the areas in which you’re looking to buy. Popular websites such as Rightmove and Zoopla will be able to give you a rough indication. Of course, house prices will change over time so consistently monitor this to work out if you need to save more or less.

Most first time buyers will use a mortgage (a loan offered by a bank or building society) to purchase their first property. In order to get a mortgage, you will often need to build a deposit (a percentage of the house’s value in cash); this is one of the biggest hurdles before getting onto the property ladder.

Deposit

In the past, it was possible to buy a home with a very low deposit and sometimes no deposit at all (called 100% mortgages). The 100% relates to the amount of the loan (mortgage) relative to the value of the property.

Today, however, you usually need a largerdeposit (around 20%). Generally, thehigher the deposit you can put down on theproperty (and thus the lower the amountyou’re borrowing), the better the mortgagedeal you can secure and the lower yourmonthly payments will be. This is mainlybecause the mortgage lender is takingless risk by lending you a smaller amountrelative to the current value of the property.The minimum deposit is generally 5% of the

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value of the property but as explained above, if you only have the minimum deposit you are likely to end up with a more expensive mortgage.

It was recently announced the average UK house price was over £220,000 meaning you could need a £44,000 deposit (20% of £220,000) in order to get a decent mortgage. If you live in London, this amount will probably be substantially more.

The government’s Help to Buy scheme might also be able to help you in buying your first home. Visit www.gov.uk/affordable-home-ownership-schemes/overview for more information.

Surveys

The mortgage lender may require a survey to ensure the property is suitable security for the loan required. There are various types of surveys and their costs vary depending on the value of the property. The costs estimated below are based on a property valued around £220,000. Broadly speaking, the greater the value of the property, the higher the cost of the survey.

Mortgage valuation fee – the mortgage lender will assess the value of the property to establish how much they’re prepared to lend. This survey doesn’t include details about the condition of the property. Costs are

typically between £150 and £300.

A HomeBuyer Report – this is a much more comprehensive survey which will give you more details about the property’s condition, such as problems with the walls, roof or wiring. Paying for a good report might be worth it as it could save you money further down the line if the property needs extensive repairs. These reports are more expensive and can cost around £400.

Stamp duty

If you buy a house worth over £125,000(except in Scotland where different ratesapply), you will normally have to pay stamp duty land tax. The amount of tax you pay will vary based on the value of the property. The rates for residential property are up to a value of £925,000 shown below (higher rates apply for higher values):

Property value Stamp duty

Below £125,000 0%

£125,001 – £250,000 2%

£250,001 - £925,000 5%

Stamp duty is calculated in a similar way to income tax. This means for a £220,000 property, you would pay no tax on the first £125,000 but 2% stamp duty on the next £95,000 (£1,900 in stamp duty).

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Legal fees

You need to hire a solicitor when you buy and sell a house and the charges will usually range between £500 and £1,500.

Searches – as part of the process, your solicitor will check with various authorities to see whether there are any issues in your area which may affect your property and its future value. This could include searches to find out if there are any new major roads planned or check your house isn’t at risk of flooding. Typical costs are £300.

Other charges

● Land registry fee – usually around £100● Mortgage arrangement fee – this is a

fee you pay the lender to set up your mortgage and can cost over £2,000

● Higher lending charges – this is a charge occasionally levied by the mortgage provider if your loan to value is above a certain percentage (e.g. 90%). This is to cover the cost of them insuring against you defaulting on the mortgage. Typical costs are £500 to £750

● Removal costs – removal firms will usually charge more at weekends and the end of the month . You can expect to pay between £300 and £600 if you use a removal firm

● Decoration and other maintenance – depending on the state of the house you purchase, you might need to improve its condition

As the above highlights, there are numerous costs involved when purchasing your first property which need to be accounted for. Below, we have provided an example of the estimated amounts you might might need when purchasing a £220,000 property.

Deposit (20%) £44,000

Mortgage arrangement fee £1,000

Stamp duty £1,900

Legal fees £400

Mortgage valuation fee £150

Home buyers report £500

Searches £300

Land registry fee £95

Removal costs £300

Total £48,645

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How much should I regularly save?

Once you’ve worked out how much you need to save, you can begin to make a plan to reach this goal.

It may sound obvious, but spending less than you earn and saving the difference is essential. Sometimes this is easier said than done especially when larger bills appear.

Prioritise your spending to allow yourself some luxuries but take into account the more you save, the sooner you can buy your first home.

Set yourself a goal of how much you would like to save and then stick to it. This needs to be testing but not excessive otherwise you’re likely to lose motivation.

Cut back on unnecessary spending, not essentials - even if they don’t seem immediately beneficial. For example, you may want to continue with your membership of a workplace pension scheme so you benefit from the employer contribution.

The power of regular savings

Instead of saving small amounts at irregular intervals, it’s often better to set up a regular savings plan where money is automatically taken from your bank account each month.

This means you get used to not seeing the extra money in your account. Most bank and investment accounts will allow you to set up a standing order or direct debit.

You can find out how much you need to save each month to meet your target by using various tools available to you. Hargreaves Lansdown’s Regular Savings Calculator allows you to calculate how much you’ll need to save and invest each month over a specified period of time.

For example, if your target was to save £45,000 over five years, the calculator shows that you’d need to save £660.76 each month, based on an assumed growth rate of 5%.

Use our regular savings calculator – find out how much you need to save

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Don’t worry if the amount you need to save seems unaffordable. Start saving what you can afford – most people start small and work their way up. Over time, you should aim to increase the amount as and when you can.

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Should I save or invest?

Saving into cash

Firstly, it’s important to have enough cash at hand in case of emergencies (around three to six months of your salary is usually considered sufficient). Beyond this, the general rule is that if you’re planning to use the money in less than five years, it’s probably best to keep your money in cash whereas if you’re saving for longer, investing might be a better way forward.

Investing in the stock market

If you’re planning on saving for over five years before you purchase your home, it’s often better to consider investing, if you are happy with the risks involved. This is because inflation can seriously affect the value of cash savings over the medium and long term (especially given the meagre interest rates currently being offered).

Also, the stock market has historically performed better than cash over longer timeframes (as illustrated by the chart on the next page). It is important to note, however, that cash offers security of capital, so its value won’t fall, whereas stock market investments can fall in value as well as rise so investors could get back less than they invested.

One of the key questions to consider when saving for your first home… should I save my money in cash or invest? The answer to this question will largely depend on how long you’re planning on saving for.

Saving usually means putting your money into cash products, such as a bank or building society account, while investing involves taking your money and putting it into products (such as funds) which offer the potential for it to grow over time. Please note, investments will fall in value as well as rise so you could make a loss. Below we explain the pros and cons of saving into cash and investing in the stock market.

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CASH OR THE STOCK MARKET?

The chart shows the number of 5 and

10 year periods that the stock market

has outperformed cash and vice versa

since 1899. The stock market has

historically been the better performer

and the longer the investment period,

the higher the probability of the stock

market beating cash. That is not to say

money cannot be made in the short

term, but the probability increases

significantly over the longer term, as

the chart shows. Of course, there are

no guarantees. Cash offers security of

capital, so its value won’t fall, whereas

stock market investments can fall in

value as well as rise so investors could

get back less than they invested, no

matter how long they invest for. Source:

Barclays Equity Gilt Study 2016

Cash performed best

Stock marketperformed best

Cash performed best

Stock marketperformed best

100%

80%

60%

40%

20%

0%

each 5yr period across last 116 yrs

each 10yr period across last 116 yrs

PERFORMANCE OF THE STOCK MARKET AND CASH OVER 5 AND 10 YEAR PERIODS

Past performance should not be seen as a guide to the future.

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ISAs: helping you save for your first home

For most people, ISAs will be one of the first considerations when planning to save for their first home. Over 12 million adults in the UK opened an ISA in 2015/16 and it’s easy to see why. ISAs are easy to understand, flexible and offer a range of tax benefits. Below, we highlight some of the main types of ISAs you might consider when purchasing your first home.

Lifetime ISA

Launched in April 2017, the Lifetime ISA is aimed at helping anyone aged between 18 and 39 save for their first home. You can contribute up to £4,000 each year and any contributions made before your 50th birthday will receive an added 25% bonus from the government. This means for every

£4 contributed, the government will add a further £1 (up to a maximum of £1,000 a year).

You can use some or all of the money in your Lifetime ISA to save towards buying your first home or you also have the flexibility to keep it until you’re over 60 for your retirement. It should be noted that there will usually be penalties if you choose to withdraw the funds for purposes other than purchasing your first home or retirement.

You can choose to hold cash in your Lifetime ISA or invest in the stock market. As highlighted earlier, if you expect to use the money in your Lifetime ISA within five years, cash is likely to be the most suitable option. However, if you don’t intend to access the money for more than five years, you may want to consider investing in the stock market which offers the potential for greater returns and could allow you to get one foot on the property ladder quicker. Unlike cash, however, investments can go down as well as up so you could get back less than you invest.

For more information about Lifetime ISAs, visit www.hl.co.uk/lifetime-isa

Help to Buy ISAs

The Help to Buy ISA was introduced in December 2015. It was designed to help

WHY ISAS?

Tax free interest, income and growth Choose to save in cash or invest in the

stock market Shelter up to £20,000 in 2017/18 Government bonuses on some ISA

products (see below)

Tax rules can change and the benefits depend on individual circumstances.

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first-time buyers onto the property ladder. Similar to the Lifetime ISA, the government will add a 25% bonus to the Help to Buy ISA, but there are some key differences (see table above). If you already hold a Help to Buy ISA, it is possible to transfer to a Lifetime ISA from 6 April 2017.

Cash ISA

Cash ISAs operate just like a normal savings account except all the interest is tax free and there is a limit on how much you can subscribe each tax year. The interest rate offered in a Cash ISA will vary based on which provider you choose. Therefore, it’s essential to shop around for the best

Lifetime ISAs vs. Help to buy ISA

Lifetime ISA Help To Buy ISA

How much can you save each year? £4,000 £2,400 (£3,400 in the first year)

Can you invest lump sums? Yes

No – monthly payments only (£200 maximum per month) although you can make one additional payment of £1,000 in the first month

What is the maximum bonus? £32,000 £3,000

When do I receive the government bonus?

Annually for 2017/18 tax year and monthly from 2018/19

When you buy your first home

Can I earn interest on, or investthe government bonus?

Yes. You can invest or earn interest on the government bonus as soon as it has been paid in to your Lifetime ISA

No. The bonus is paid to your solicitor or conveyancer when you buy your first home

When can I use the money to buy a house?

After 12 months After £1,600 has been saved

Who can open the account? Adults under 40 First-time buyers aged over 16

What’s the maximum propertyvalue allowed?

£450,000 £250,000 (£450,000 in London)

Can I use the money other than to buy a house?

Yes, you can also withdraw the money tax free after age 60.

Yes, but you will not qualify for the government bonus on any amounts you withdraw

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deal using the best buy tables which can be found in the press or online. Watch out for headline-grabbing introductory rates or temporary bonuses though, as when these disappear you could be left with an unattractive rate.

Stocks & Shares ISAs

Investing in a Stocks & Shares ISA could give you a better return over the long term and be appropriate if you’re planning to buy a house in over five years’ time. A Stocks & Shares ISA is a tax-efficient investment account allowing you to hold a variety of

investments together and save tax. In a Stocks & Shares ISA, you can hold funds, shares, investment trusts, corporate bonds and more and protect them from UK tax. Unlike Cash ISAs, the value of your holdings in a Stocks & Shares ISA can go down as well as up so you could lose money. However, investing in a Stocks & Shares ISA offers the possibility of higher returns. Further information about ISAs can be found at www.hl.co.uk/isa

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Seven reasons to invest with Hargreaves Lansdown

If you’re looking to invest to buy your first home, Hargreaves Lansdown offers an award-winning Stocks & Shares ISA giving you the freedom and choice to reach your goal. We also provide a range of tools to help you plan. So, why should you invest with Hargreaves Lansdown?

1. Financially secure business – we are an established FTSE 100 company with no debt.

2. UK’s number 1 ‘investment supermarket’ – with more than 30 years’ experience helping investors make the most of their money. We are entrusted with over £70 billion by 876,000 clients.

3. Competitive charges – just 0.45% per annum (capped at £45 for shares) to hold investments and no charges to buy and sell funds, plus a low cost reinvestment service. View our charges

4. Fantastic customer service – 96%* of our clients rate our service as ‘good’, ‘very good’ or ‘excellent’.

5. Wide investment choice – choose from over 2,500 funds as well as shares, investment trusts and more. Also,

you can invest in our Portfolio+ service and leave the day-to-day management to our experts.

6. Easy to set up – Open an ISA in less than five minutes online with as little as £1.

7. Free tools and research – we provide interactive calculators and guides to give you access to the best possible information.

*HL Client Satisfaction Survey, November 2016, 712 respondents

Find out more about Hargreaves Lansdown’s Stocks & Shares ISA

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