Helping your kids with that elusive deposit for a first home
Empty nesters. It’s a blissfully appealing phrase and represents a time in our future lives many of us look forward to after years of providing our wee angels with free board and lodging, laundry, taxi services, a mountain of food and maybe even private education. But for 15% – and rising – of Scots over the age of 50, the fabled empty nest is perhaps something they will only ever be able to dream about since they continue to have grown up children living at home.
The average age of this group of adult children still living with their parents is 27. This is a lose:lose situation for all in my opinion. The offspring, desperate for independence and privacy can’t get on the property ladder and the parents, keen to reap the rewards of their hard-working lives, find themselves having to raid their savings, due to the unexpected expense of continuing to have to provide for their adult children.
The reason, of course, that adult children are having to stay on with mum and dad is the massive amount they now need to put down as a deposit on a first home – as much as 20%.*
The amount that is required as a deposit varies, of course, depending on the type of house and the region but a recent survey shows that the average deposit on a home is £26,500. That varies between £14,500 in some parts of the country to as much as £72,800 in London. Then there are scare stories that report a young person who wants to buy their first home will require an average deposit of £60,000 by the end of the decade!**
For many parents though, it needn’t be that way. Although it might take some discipline and not a little sacrifice, having a few savings and investment plans in place to cope with the demands of kids as they move into adulthood is possible.
Clearly, parents need to get themselves into a savings and investment habit as early as possible so that they’re able to help kids with that all-important deposit for a first house so that they don’t have to overstay their welcome!
Cash ISAs are traditionally the first port of call for savers with their big attraction being that interest is added once a year free of income tax. Although today’s climate of persistently low interest rates make Cash ISAs less attractive, they remain a highly popular form of saving.
If parents have their Cash ISA sorted, they can regard this as their fund for the things they want in life be it a special holiday to mark a key anniversary or a home improvement.
But there’s another ISA allowance that you can take advantage of. The vast majority of people saving and investing don’t know they are entitled to two tax-free ISAs every year – a Cash ISA and an Investment ISA†. In fact only 13% of people with an ISA make use of their Investment ISA allowance. Making use of this second ISA allowance could be ideal for many parents as a vehicle for putting money aside to help with the deposit for their offspring’s first home. Tax-free means the fund your plan invests in grows free of income and capital gains tax (other than tax on dividends from UK shares). The maximum you can invest in an Investment ISA is £11,520 in the tax year 2013-14 less any amounts subscribed to a Cash ISA.
Taking out an Investment ISA means it can be earmarked for the express purpose of getting the kids out the house when the time is right. It also means parents know the value of the investment in this fund and can gauge how if it’s on track to meet the target payout.
The stock market is a riskier home for money than a Cash ISA but in return for that risk comes the potential for better returns. Over longer periods, stocks and shares can potentially deliver better returns than cash, despite periodic bouts of volatility. Bear in mind that you should consider this a medium to long-term investment and aim to invest for a period of at least 5 years – ideally 10.
If you invest in stocks and shares, the value of your investment and any income from it can go down as well and you could get back less than you have invested – your original investment is not guaranteed. Savings in deposit accounts offer access to your money without penalty and your savings are guaranteed.
Parents, some of whom may be taking their first step into an Investment ISA, might have trepidations. Perhaps they feel their investment is tied up, but this needn’t be the case. Even if they can put away £10 a month, at present, there are Investment ISAs in the marketplace that allow you to increase, decrease or even take a break – if you need to – from your monthly payment.
Investing for a child’s future under the umbrella of your own ISA means you’re in control. Of course parents, and wider family members, also have the option of taking out an investment in the name of the child in the form of a Junior ISA (provided the child does not already have a Child Trust Fund). In this instance, parents don’t have control and when the child turns eighteen they could end up blowing their parents hard-earned savings and investments on heaven-knows-what. And guess what? Your dream of them moving into their own home giving you the opportunity of turning their downstairs bedroom into that little dining room you’ve always wanted has just gone up in smoke!
However you do it, the secret to saving and investing to help your children get onto that first rung on the housing ladder is to start now! And make sure you are educating your kids on the importance of saving and investing – get them into the habit as early as possible as it takes the pressure off you, allowing you to enjoy your empty nest years.
The key to the door of your kids’ first house isn’t a lump of metal fashioned by a locksmith; it’s putting aside some of that loose brass in your pocket.
* Source: BBC News – House purchases by first-time buyers ‘up 12%’
** Source: Daily Mail – First-time buyers will need a £60,000 deposit by end of decade
† Legally known as a Stocks and Shares ISA but it can invest in much more than its name suggests.