Want to buy a home? Look at these ISAs while you can
PUBLISHED: 10:58 14 December 2017
London has always revelled in its reputation for being different, attracting praise and scorn in equal measure.
Dr Johnson famously wrote that “when a man is tired of London, he is tired of life; for there is in London all that life can afford.” Arthur Conan Doyle, however, called it a “great cesspool”; Disraeli referred to the city as “a modern Babylon”, while John Dryden, perhaps mourning the city’s commercial streak, noted that:
“So poetry, which is in Oxford made
An art, in London only is a trade.”
Clearly, mixed with London’s often breath-taking architecture and surprising number of open spaces are several examples of ropey buildings and brutalist art, but this vibrant melting pot of peoples, ideas, attitudes and occasional oddball boasts a transport system as efficient and clean as any capital city, while its reputation for being considered unfriendly is, I think, a little unfair.
I like London. Lived there for a few years – it’s where I met my wife – though I’m pleased we don’t live there anymore. Like New York, London is a young person’s town, a 100mph, let’s-get-there-now place. You could argue that this has always been the case, but London’s differences have become even more pronounced over the past 30-odd years. No other UK city centre, except perhaps that of Manchester, looks or feels anything like London, possibly because since the mid-1980s, the gap between the price of housing in the capital and elsewhere in the country has widened, from a point that prompted no more than a raised eyebrow to become positively canyon-esque.
According to a report published last week by Hometrack, house prices in the capital are now more than 14 times average London earnings. An average house, average for goodness sake, will set you back a few quid short of half a million (£496,000). Salaries, by contrast, average just £34,200 which, after tax and NIC (an income tax by any other name), equates to around £27,000.
Assuming a London-based couple, each earning an average salary, could save and subsequently plead with the bank of Mum & Dad to help them accumulate the 10% deposit with which to buy an average home. Let’s call it £50,000. They would then need to borrow £446,000 at, say, 2.5% fixed for 30 years, which equates to mortgage repayments of £1,775 a month. Arranging the same deal over 25 years would cost them more than £24,000 a year.
Then there’s council tax, utility bills, commuting expenses and a host of other outgoings which make me wonder how on earth anyone in the capital can afford to walk around grasping one of those expensive coffees everyone under 35 appears so keen to hold onto.
While this quick calculation focuses on London, it might seem a little depressing for anyone considering buying a home, irrespective of where it is, although help is at hand in the form of two specific types of ISA, provided you get your skates on.
There are half a dozen variants on the ISA theme, but the ones most likely to appeal to first time buyers are the Help to Buy (HTB) version and the Lifetime ISA (Lisa).
HTB ISAs were introduced in December 2015 and in a little less than two years (November 2019), it will no longer be possible to open a new one. Individuals may save up to £12,000 into an HTB ISA and provided they have a minimum of £1,600 in the account when buying a home, a 25% taxpayer bonus is added, to a maximum of £3,000. Couples keen to get a foot on the housing ladder can, therefore, each save the maximum amount which, in theory, would give them a joint £30,000 towards their property purchase.
The Lisa, introduced in April and targeted specifically at 18-39-year-old savers, is slightly more generous, although as you may have guessed, state largesse is invariably accompanied by restrictions. This is true of the Lisa, though it has a potentially dual role.
Up to £4,000 a year can be saved into a Lisa, which also attracts a 25% taxpayer bonus. However, the funds may only be used (by first-time buyers) to buy a home, or alternatively, for retirement.
Savings can continue to be made up to the age of 50; anyone saving the maximum amount each year would, therefore, receive bonuses up to £33,000, but for those considering using the funds in a Lisa for retirement, a 25% penalty applies if they withdraw the cash before reaching 60.
This potentially nasty sting in the tail may dissuade people from using the Lisa as a form of pension saving, but for prospective home buyers, it looks at least as attractive as the HTB ISA. Of course, if you’re planning to buy in London, saving the maximum into either ISA is a good idea and if you have £2.50 left over, the occasional punt on the Lottery may pay dividends. Good luck.