Pitfalls of Diligent Saving

Hawley_Gryphon

TL/DR: Do the government want to encourage you to save for your first house and retirement, or do they want to punish you for saving and wish you would fritter away every penny you've got?

Hi folks, I'm a long time browser of this site but I don't chime in on the forums very often. I'm hoping that there might be some people out there with a wise head on their shoulders who can offer some advice to this perplexing problem. I've been doing some research on benefits, such as housing benefits, and how savings effect them. Over the last ten years I have been quietly and diligently scrimping and saving every spare penny I could to put towards a house deposit. It's a long, slow, arduous process of a fiver here, a tenner there - but always regular as clockwork so it's dripping away into the savings account. Now, I'm honest to a fault and of course when it comes time for the annual assessment for housing benefits, tax credits and the like I always tell them the truth about how much savings I've got, without giving it a second thought really. Only, it turns out that if you manage to save £16,000 you're then no longer able to claim housing benefit, income support or any of that sort of thing. Tax credits and child tax credits are apparently still all right about it, but nothing else is. I learned this when the housing benefits team dropped me a letter thanking me for my information and to let me know I'm no longer getting any help.

What's more, I've been reading that the government consider that any savings you have earns £1 interest a week for every £250 or part £250 that you've got. My goodness me! I don't know whom they're banking with, but that is a staggering good level of interest they think people are getting on their savings. Their complete detachment from reality aside, I must admit it feels a bit like mixed messages. On the one hand the government are encouraging people to save by supporting the Lifetime ISA, (which can only be used for buying a home or retiring aged 65) and on the other hand they're saying that if you manage to get to the £16K point you're clearly instantly set up for life and are good to go(!)
So they'll whisk away any of the benefits or financial help you were receiving and leave you to live in the lap of luxury(!) on the immense amounts of interest they seem to think your savings are accruing. What do they realistically expect people to do? Save for a deposit - but only on the basis that the deposit costs no more than £15,999? What kind of world are they living in where not only do they think people are earning £1 in interest for every £250 they've got in savings, but also that they'll be able to put down £15,999 deposit on a house in this day and age? I went and looked at some mortgage calculators and believe me, £15,999 gets you no where, unless you're happy paying a mortgage off for the next 50+ years.

I'm hoping that there are people on this forum who've either dealt with this and figured something out. Or who've looked into this and realised it's not as ludicrous as it appears and I've in fact read it wrong?

Any other words of wisdom or advice out there that might help because right now my LISA is getting closer and closer to reaching the dreaded £16,000 mark (remember, this has taken a decade of (practically) living off beans on toast, no car, no TV, no holidays, no new clothes, no new shoes, no haircuts, no takeaway coffees, no pre-packed sandwiches, no fancy restaurants - you get the idea) and as a result of a decade of living close to the bone so I can put money aside for a deposit, I discover that I will in fact be penalised for this? Can this be right?

hazyjo

Home ownership isn't for everyone. If saving around £130 a month means you have to live as frugally as you say, I would sadly have to conclude it may not be for you. How would you afford to fix a roof? Call out a plumber? Replace a boiler?  Home ownership can be expensive!

Getting_greyer

I agree the assumed income from interest is ridiculous. The reason is either a snide way of paying out less or some really smart reason I can't think of. 

If someone is getting income support and housing benefit etc. Are they likely to be offered a mortgage anyway? 

There needs to be some line drawn in the sand though reference assets.  Is it right to give some type of benefits to someone who has a significant cash pot ?  

yksi

hazyjo said:

Home ownership isn't for everyone. If saving around £130 a month means you have to live as frugally as you say, I would sadly have to conclude it may not be for you. How would you afford to fix a roof? Call out a plumber? Replace a boiler?  Home ownership can be expensive!

The thing is that a mortgage might be £200 per month cheaper in the first place. If you're looking at a sub-100k property you might even find it's £400 cheaper to buy than to rent. Plenty of money to call your plumber or roofer once a month. Being a renter without a choice - ie being poor - is very expensive. It leaves us looking at the mortgage calculators and knowing that we'd be better off, so we're more determined to save than ever to try to get ourselves to that position, but then thwarted by rules than seem intended to make life difficult for those who try hardest.

The assumed rate is quite conservative for historic, averaged asset income, where most people with medium-risk investments are looking at 7% over time. The problem is that right now you can't even get 2%, so it certainly does feel like you're being punished for saving money to try to improve your own finances.

Here's the crux of it though, they don't, or can't, care, whether it seems fair or not, because it comes down to only supporting those in greatest need. OP, by your actions in being thrifty, you've taken yourself out of the "greatest need" bracket. I feel your pain and have definitely wondered how else I could legitimately spend my savings in a way that they could be cashed in later when I'm ready to buy. I started by paying off my credit card even though it's 0% because it lowers the bank balance. But so far the only other thing I can see is maybe buying a warehouse full of loo roll and hand sanitiser.

hazyjo

Well perhaps the OP needs to say how much less a mortgage would be for them than rent for us to give an opinion. Granted it's often cheaper, but £400 cheaper? Find that very hard to fathom. Unless there's significant equity/deposit which there doesn't appear to be.

steampowered

Why are you living on benefits? Are you unable to work, or stuck on a low income?

Housing benefit works differently if you have a mortgage anyway. It's fair enough that the taxpayer shouldn't be paying for you to build equity in a property.

I don't think it is fair to say the government is "penalising" you. The government has been giving you money.

NewShadow

 Save for a deposit - but only on the basis that the deposit costs no more than £15,999?

 able to put down £15,999 deposit on a house in this day and age?

I went and looked at some mortgage calculators and believe me, £15,999 gets you no where, unless you're happy paying a mortgage off for the next 50+ years.

Reading this I had three initial thoughts: 

1. £16k isn't an insignificant deposit. It's more than 10% of a cheap flat and, if you are teaming it up with one of the FTB schemes it's a 5% deposit on a £320,000 house... or are you honestly telling me there aren't any acceptable flats cheaper than £300k near you? If so... I've got a decent salary and I'm moving 150 miles to afford the house I want...

2. Many people get mortgages with similar deposits - if you're saving that much on your rent then you shouldn't have a problem overpaying and getting it paid off in the standard 25-30 years. Term length will be down to affordability, not deposit size. 

3. Even if the Government were to let you save more... there aren't many lenders who will consider 100% of benefit payments as income. Are you sure you'd be loaned as much as you seem to want to borrow? 

MoneySeeker1

Getting_greyer said:

I agree the assumed income from interest is ridiculous. The reason is either a snide way of paying out less or some really smart reason I can't think of. 

If someone is getting income support and housing benefit etc. Are they likely to be offered a mortgage anyway? 

There needs to be some line drawn in the sand though reference assets.  Is it right to give some type of benefits to someone who has a significant cash pot ?  

Actually I know exactly what OP means and I used to fear for my savings whilst I was still in work and it meant I never dared get much in the way of savings (ie in case they got nicked off me by Government rules). I certainly feared unemployment and wondered how on earth I was supposed to show that savings weren't for "me" - they were "house deposit savings" and I never did work out how to get round that.

There should be some official way it's possible to put aside house deposit money without it counting as "personal savings". The only way I managed to put any savings to one side in a way the DWP couldnt touch if it came to it was to put it into extra job pension and they knew that I, provably, couldnt get at that money myself until it came to retirement. At which point I could - and did - get my savings safely back.

It was upsetting to have to spend what little money I had - whether I wanted to or no - in order to make sure I "kept" it myself.

ian1246

I also agree with others who have queried whether home ownership is necessarily the best plan if income is likely to be tight - in-case something goes wrong.

That said, Op - if you genuinely  and accurately crunch the numbers and do the research and its viable, go for it.

Home ownership is not for everyone - especially if the owner is reliant on benefits to pay for it given how complicated the entitlement to benefits could be and whether, as equity builds up, the OP would remain entitled to the same benefits throughout the course of the mortgage? I have no idea - research is key.

Would a better quality of life be served if instead the OP keeps £15,999 in emergency savings and continues to rent and live less frugally whilst retaining access to all benefits vs. Loosing those benefits and having the associated costs of home ownership.

Also - what about retirement? What pension provisions have been put inplace. Dont rob your future self for the benefit of today, if its going to leave you living an extremely bleak/depressing retirement (again factoring in the impact home ownership may have on future pension benefits/entitlements).

Just some hopefully useful thoughts for the OP.

In terms of bank accounts paying interest - look up Martin Lewis's best saving/current accounts or the regular savings thread in the savings & investments section of this forum.

diggingdude

Put some money under the mattress? 

Hawley_Gryphon

Gosh, thank you for your comments and suggestions everyone. I had thought that the MSE website would have notified me that people had replied to my post! 

I've read all of your comments, thank you for your support and understanding for the most part. I get that when the word "benefit" is mentioned in any capacity there can sometimes be a negative reaction or a connotation of implied scroungers. I am employed and a full time single parent to a school aged child. The rent and bills eat up 45% of my take home pay and benefits each month, from the remainder I put 36% into savings and the other 19% is for groceries, clothing, cleaning supplies, packed lunches, school dinners etc. I cut my cloth accordingly to what I have available and we're used to really appreciating what we've got.

We've got a saying we like in this house "use it up, wear it out, make do or do without."

Currently it's costing us £500 a month for the 2 up 2 down we're renting, I've looked at mortgage calculators and it seems that mortgage repayments are cheaper than paying rent. I'm anxious about the added costs and responsibilities that come with home ownership, I'm not particularly handy and I dread the thought of dealing with unscrupulous trades people. However, my landlord is one of those "absentee" types who doesn't get anything done so I'm not much better off here. At least I'd be able to do something about repairs if I was in my own home.
Anyway, I'm still climbing every mountain and fording every stream and since I last posted I'm now up to £17,000 towards my house fund! Yey!