From Saving For A House, To First Time Investing
As a parent, you want to help your child stand on their own two feet and manage their finances fruitfully.
Offering words of wisdom and encouraging them to mimic your financial successes simply will not cut the mustard. Your children are growing up today in an entirely different world to the one you grew up in.
They face financial struggles today that are completely alien to our older generations. It’s unlikely that by replicating your actions, they will achieve the same results as you did.
Millions of young adults are entering adulthood with a good education, accompanied by large student loans and slim to no job prospects. This economic climate has caused many young adults to rely heavily on their parents for financial help. Fortunately, there are some government schemes, accompanied by some modern technologies, which have been set up to support this cohort.
Navigating the new financial climate and culture is extremely complex today. Here is your guide to helping your children to manage their finances more effectively as they emerge into adulthood.
Paying Off Debt
If your child went to university or moved out of the family home, it is likely that they will have incurred some form of debt.
Many banks offer students' interest-free’ overdrafts as part of their Student Account package. These can range from £250 to a sizeable £3,000, a very enticing package that is in fact taken up by approximately 49% of students in the U.K.
Following their graduation, however, they have a 'grace’ period before they have to commence paying back their interest and charges, and this can be up to two to three years in some cases. It is important to acknowledge here that if they do not pay off their overdraft by the deadline, the charges can be hefty. NatWest customers, as an example, can face an interest rate of 19.89% and a £6 monthly fee.
If your grown-up child has any amount of debt, primarily they need to calculate how much they need to pay back per month, in order to meet the deadline. If they can afford to repay their debt sooner, they should do so. This type of debt may, indeed, affect their credit rating.
It most circumstances it is advisable to prioritise paying off debt over savings or investing. This is because the ongoing cost of debt is at a higher rate than you can achieve through most savings and investments, and this is pivotal.
Any other debt they may have accumulated during their studies, such as credit cards or store cards, should be paid off as soon as possible. If they have multiple debts, prioritise those with the highest interest first as these will cost your child more.
Warning Note: Do not repay their Student Loan account ( see this blog to understand why. Chelsey, link to recent blog)
Saving For a First Home
For first-time buyers, getting a foot on the property ladder has in today’s financial climate become costly. Many adult children rely on the 'bank of Mum and Dad’ to help fund the hefty deposits that are required. In fact, one-third of first-time buyers have financial help from their family or friends, and this is because house prices in the U.K. alone have risen significantly over the last 50 years. Therefore, being accepted for a mortgage is increasingly challenging for first-time buyers today.
The Government, however, has implemented beacons of hope for these younger generations, and this has come in the form of specific schemes. Before delving into the steps that need to be taken to start saving for a house, here are a few ways the Government can support you in getting on the property ladder:
- Introducing LISA (Lifetime ISA).
LISA is an efficient way for 18-40 year-olds to save for their house deposit. Each year, up to age 50, £4,000 can be deposited into a LISA, and HMRC then adds a 25% bonus. By investing the full £4,000 allowance, the Government will give an extra £1,000 a year. It must be remembered that the LISA does count against the personal ISA allowance of £20,000.
If the account holder decides not to proceed to purchase a property, then this money can instead be used toward their retirement. Any withdrawals from the account will result in a 25% penalty – unless the withdrawal is for buying your first home, being diagnosed with a terminal illness or it is a withdrawal at the age of 60 or over.
You can find more information from HMRC about LISAs here.
- Help to Buy Equity Loans
A new build may be the way forward in getting on to the property ladder, via the Government’s 'Help to Buy’ Equity Loan scheme.
These schemes are to assist first-time buyers or existing homeowners in purchasing a new build home under £600,000 (London). You require a significantly lower deposit with these schemes (5%), with the Government providing an interest-free loan, with the interest-free part, lasting for five years. The loan covers part of the cost of the property (40% for London and 20% elsewhere). Your adult child will then require a mortgage to finance the remaining balance for the purchase price.
You can find out a lot more about Help to Buy here.
First-Time Buyers Reduced Stamp Duty Land Tax (SDLT)
Any property in England or Northern Ireland is subject to stamp duty land tax. Anyone purchasing a first home for less than £300,000 however, is exempt from paying this tax. Those purchasing a property valued between £300,000 and £500,000 will pay a 5% stamp duty on the difference between £300,000 and the actual purchase price of the property.
Any first-time purchase above £500,000 is not entitled to the relief, and therefore SDLT will be charged at the full rate.
As parents, you can help to guide your children through these schemes and help identify which one will be most effective for their situation.
There are now events to inform buyers of the ways to get on to the property ladder, providing details of the schemes that are on offer to support buyers. See some First-time buyers’ events here.
How To Get Started
- The first place to begin is to work out how much your child can borrow. There are several mortgage calculators online, such as the HSBC Mortgage Calculator. If they can anticipate how much they will be earning when they are ready to buy, these figures can be used.
- Once they know how much they can borrow, they can research what type of property they can afford. If their ideal first-time home is not within budget, they may need to go back to the calculator to review what they need to earn to purchase what they want. Alternatively, they can ask friends and family to determine if a larger deposit is a viable option.
- Once they have a solid idea of what property they want, they can then identify the amount of deposit that will be required, usually being between 10%-30% of the house price.
- Next, they can consider how much money they will have to allow for initial costs, including solicitor fees, moving costs and furniture. These costs cannot be underestimated!
- With these determined, they could then calculate how much money they will need to save per month to fulfil the deposit and initial costs within their chosen timeframe.
Medium/high-interest debts should be paid before considering investing. Investing is ultimately long-term, and investments can rise and fall.
When your grown-up children are financially secure and ready to invest, it is beneficial to educate them about how to invest effectively. It is important that they understand some core principles; this may be a good blog to show them.
You could bring your child with you to meet your financial planner to get a good understanding of investments.
If your grown-up child has under £50,000 to invest and their circumstances are not too complicated, they could consider Robo-investing. This is one way to start investing and build up some wealth. There are several Robo-advisers to choose from, including Nutmeg, Moneybox and Wealthify.
When choosing a Robo-advisor, it is important to consider:
- Account minimum
- Total assets under management
- Online security
- Account types
- 100% Robotic versus Additional Human Assistance
- Asset/Portfolio Allocation
If your child has more than £250,000, their situation is likely to be complex enough to require a financial planner; it is good, therefore to introduce your financial planner to them. Sharing a financial planner enables you to undertake inter-generational financial planning.
It may seem like a long way off, but for the younger generation to have adequate retirement income, they need to start early.
According to data from the OECD (The Organisation for Economic Co-operation and Development), today’s 23-year-old will retire at the age of 68. It is therefore estimated they will need a staggering £80k more in retirement than their grandparents did.
Unlike their predecessors, this generation is unlikely to receive a full state pension or even less likely, a final salary pension. Instead, workplace pension schemes are the norm, which employees and employers pay into. All employers must offer a scheme, known as 'automatic enrolment'. NEST is the government provider.
The investments often rely on stock market returns, which rise as well as slump. Members can switch funds to match religious beliefs, ethical choice, or risk and reward.
The younger generation can help to level the playing field by starting early and taking advantage of compound interest during their working life.
A Telegraph article explains how a 23-year-old who contributes £250 per month to their pension, rising to £500 monthly, by the age of 30, could, with realistic 5% returns, retire at 65 with a pension pot worth £692,000. That might pay for a 30-year retirement.
A general rule of thumb when working out the percentage of salary to save is half your age. For example, if your child is 22 years old, they should be saving 11%; their employer may contribute to this.
If you need help navigating the complex waters of modern-day finance, we’ll be happy to help. Give Capital a call today to speak to one of our Chartered Financial Planners.