Sanity check on my ISA and H2B strategy

DaveBowman

Hi everyone,

First post here! But I do I know people here do have some contempt for H2B. I'm aware of the risks and possible equity traps - but, in light of my personal circumstances and the opportunity cost of renting in London, I am confident that Help 2 Buy is probably the most appropriate, and quite possibly the only feasible way, of getting on the property ladder (gosh I hate that term) in the next 5 years or so. More than happy to hear your thoughts on this though.

I think it's better to start with assumptions/backgrounds in order to get a clearer picture of what should be my strategy:

1. Goal - I moved to the UK in September 2018, with my partner (we're both mid 20s), from another EU country (was offered a job in London). Our permanent residence in the UK is subject to (i) this country not hitting rock bottom and becoming a second tier developed country because of the gammon (you know what I mean); (ii) not getting an extremely more favourable job offer elsewhere in Europe during the next year/two years (there's a chance this might happen - this is related to some passive-aggressive preparation work I'm doing in case (i) happens, but it's not something that is certain to happen, obviously. I do like it here). In other words, this pretty means a lifetime ISA is a bad idea for me, as I am not buying a house for certain. But if I'm staying here, I want to leave the rental market ASAP as it is extortionate and, if I'm not leaving in 2 years, then I do want to get settled here for good.
   
   
2. Income & Saving rates - Our current income is ~GBP 60,000.00. We can save/we are saving about GBP 500-700 (without much effort or planning at the moment). I expect our joint income to grow up to GBP 80,000.00 - GBP 90,000.00 in 1/2 years (under normal circumstances - hopefully, it'll be more, but I've got to be conservative here). I, therefore, think we can be saving up to ~GBP 1,200/month in about 1 year (conservative), and can top-up the GBP 3,400 for year 1 right away.
   
   
3. Current Savings: We have about GBP 6,000.00 "saved" as of April, all of it essentially saved since we moved to London (which, by the way, means I'm actually saving more than 700 a month on average - cool!). We did not get to save anything where we living (that's part of the reason why we've left). And by "saved" at the moment I mean money that's lying around in our current account without accruing any interest or anything and that is "untouched" (I'm not including money that will be used for our current expenses, as well as money held as deposit for our tenancy, etc.). This is, unfortunately, the case because your credit score system kept from me opening a proper savings account until now. That'll hopefully change in May (see B. below).
   
   
4. Royal Bank of Mom and Dad: I do expect some windfalls in the mid-term, as a relative passed away recently and part of his estate is now my parents' and they're selling it (NB: I do not own nor will not own property because of this, so I should be ok for H2B). I expect my parents to help me with the deposit for our first house using part of this windfall - mileage may vary, but I think EUR 50,000.00 from them is a good bet. I'd rather not count on this though, as market liquidity for that property might pose a challenge and the property is owned by my father and my aunt (and although she wants to sell it too, it adds a degree of "temporal complexity" to the whole situation).
   
   
5. Summary: by maximising Help to Buy ISA contributions, I think we could get 24,400 (sans interest) + 25% as bonus = GBP 30,500 by 2023. Ergo, in a no windfalls scenario, we'd have ~GBP 30,500 saved in about 5 years for a deposit, more if my folks help us. Now, unfortunately, this being London, means this is a ridiculous deposit, so no way I'm ever getting close to the 20% holy grail everyone talks about (not even 10% with the EUR 50,000.00 windfall, assuming a 500K property as a benchmark). In fact, GBP 30,500 would be little above 5%. In addition, if lenders only lend x4.5 of your annual income, even if I had the windfall helping me, our income could be an issue - I suppose. Which brings us to H2B London...

The Plan

A. Yes, I know H2B inflated prices and a possible equity trap - that's a given. But there's no other way around the fact my deposit won't be enough outside the scheme (I think). And whatever equity trap might lie ahead of me, it's almost certainly less expensive than the cost of opportunity of renting in London for a decade (rent money isn't equity). Bearing in mind that my investment decision (and residence in the UK) is actually contingent on Brexit (or lack thereof), hopefully negative equity will be less of a possibility by then.

B. I assume I can use my H2B ISA for a H2B deposit - ... right? I can't see why not. Couldn't find anything saying otherwise at least. If so, I'm contacting Barclays in May and setting up an ISA account with them. By the way, do you know if Home 2 Buy ISA accounts are hard to apply for if you have limited credit history? I did only move here in September...

C. A 550K H2B property - Assuming a 500/550k property with a 5% deposit, that means we'd need to have GBP 27,500 as deposit - right on target, even without the EUR 50,000 windfall, as we'd have saved 30,500 (excl. interest), plus the 6K we've already got saved. The 4.5x income requirement by lenders would no longer be a problem either, because of the equity loan.

D. Pay off the equity loan ASAP - refinance/mortgage everything once the 5 years grace period is over.

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Can you do a sanity check on the above? Don't go hard on me if I'm saying something outrageous or stupid. I did try my best to do some research posting this here...!

Many thanks!

:beer:

letitbe90

You can get 5% mortgages too on normal properties, so no difference in deposit (infact maybe higher for HTB due to inflated price).

AdrianC

You don't mention what I see as the single biggest flaw in your plan.

HtB means new-build.
New-build means terrible short-to-medium term investment, simply because of the "premium" in the price - even more marked at the price level you're talking about.

I can see where you're coming from, but I think that if you plan on buying a new-build, do so for the longer term. If you're planning on buying for the short-to-medium term, then look for something that isn't going to take that hit. It's not as if you need the HtB in order to find somewhere affordable - you just might need to look a bit lower down the ladder than half-million-quid places...