Advice on Savings and Debts

GN_TDCI

Hi.

Currently my wife and I are private renting. However the landlord is selling the house and we are moving out. We have been offered a helping hand by family, in the sense that we are indirectly moving in with parents. I say indirectly as my sibling is moving back home and we are moving into their house. This offers us a great opportunity to start to save.

We have agreed a period of 2yrs as a maximum, and plan to be looking to move out on month 18.

My wife is Self Employed as she has her own business. Turnover isn't massive, so her income is often below the £12500 per year tax-free allowance, but not significantly below/
I am employed and my salary is to go up in January to £55k base with a potential 7% bonus. This puts me in the "Higher Tax" band.

We plan on stopping Child Tax Credits in the next tax year due to my salary being higher than the threshold (inclusive of bonus).

As a result of this, we are hoping to save up a significant amount and clear off as many of our debts as possible.

We currently have:

2x Help2Buy ISA's through our bank, one in each of our names. Mine has nothing in it yet, apart from a Token Deposit this month to keep it alive. The other has our savings so far in there.
1x Joint Barclay's Rainy Day Saver (5%) via the Blue Rewards

I am considering another Savings account too, in order to capitalise on the interest rates, as the limit on the Rainy Day for the high interest is £5000.

Do I need to be wary of anything in relation to TAX on Interest for the savings?
I don't think we are allowed another ISA as we have the H2B ISAs currently, so some advice on this would be helpful too.

If anyone has any advice on what I should be looking out for or conscious of, I would appreciate the tips.

penners324

What debts do you have? These should really be a priority 

PRAISETHESUN

If the interest rate on the debt is higher than the rate of interest you get on savings, then paying off the debt is a no-brainer. You can always then (re)build an emergency fund after the debts have been sorted, so I'd probably focus on throwing spare cash at them as/when available, rather than waiting to build up a savings pot and doing it all at once.

Outside of that, the only tax implications I'm aware of for your savings are the personal savings allowance (£1k for basic rate, £500 for higher rate). If you earn more interest than the allowance then you'll need to pay tax on it. Again it might make more sense to use any spare cash to tackle debts rather than save in order to reduce the amount of tax owed.

phillw

PRAISETHESUN said:

Outside of that, the only tax implications I'm aware of for your savings are the personal savings allowance (£1k for basic rate, £500 for higher rate). If you earn more interest than the allowance then you'll need to pay tax on it.

As the wife is earning less than the tax threshold then she has >£1000

GN_TDCI

Thanks.

I'm crunching the numbers in terms of debt clearance vs saving.

Ultimately, we need to have a deposit for a house rather than just saving to have a pot. So the end goal needs to be maximum saved whilst bringing down debt.

Debt includes Catalogues and Credit Cards, and 2x cars on finance. As the finance on the cars is fixed, there's little to no point clearing them off. 

In relation to the short-term debt, it's a case of seeing what happens if the balances are cleared then saved, versus saving whilst maintaining slightly elevated repayments in a more focussed approach.

So, looking at the interest, does that mean in essence I am allowed to earn £500 in interest? If so, then that's £10k in savings @ 5%.

Band7

GN_TDCI said:

So, looking at the interest, does that mean in essence I am allowed to earn £500 in interest? If so, then that's £10k in savings @ 5%.

You'd have difficulties finding an account that pays 5% on £10K

Though you could obviously both try to get a Barclays Rainy Day Saver each. Don't forget to skim off anything above £5K.

If you have exhausted your Rainy Day Saver limit, the Club Lloyds Regular Saver is ideal for building up your savings as you go. And perhaps some other Regular Savers, too 

In addition, consider getting a donor/burner account each, and start the current account switching game. An easy one to start with would be the COOP refer a friend offer. Just find a friend/colleague who has a COOP bank account and off you go.

But please heed the advice to cut your debts as much as possible before you start saving.

Perksy5

Really I'd recommend maximising your help to buy ISAs ASAP. Interest rates aren't critical here, the 25% bonus is. You need to start the clock on that right now so if you can afford to, maximise the £200 into each of your ISAs. I'm assuming if you have one of those neither have you have previously been homeowners? You won't get the 25% otherwise, even if a property was left in a will and later sold it voids your eligibility.

I'd also recommend looking into mortgage guarantee schemes. These are to replace the help to buy mortgages enabling you to get onto the ladder with a 5% deposit. For example Barclays scheme ends 31dec 2022. Too early for you however it's worth seeing if other schemes crop up in the future to assist your home buying aspirations. 

I'd also suggest you review debts if you have any. You'll need to make sure any credit card balances or car finance for example are cleared for the prospective completion date otherwise they'll in essence be included in your mortgage application, meaning you'll either be declined for a mortgage if its deemed unaffordable or your borrowing amount could be significantly lowered.

If it was me, I'd build your capital in both help to buy isas if you can both afford the max 200 per month. Beyond that, save into your highest interest rate account e.g the rainy day saver or clear any pressing finance or c.card balances.

Best wishes with your saving journey, it'll be so worth it in the end!

P.S it may be worth looking at a cash lifetime isa vs help to buy. When they were first introduced it was more beneficial for me to go down lifetime isa route instead of help to buy isa. There's great articles on comparing the two on MSE.
Id also be aware that if you've paid into a help to buy this calendar year I dont believe you can pay into a lifetime cash isa until next tax year unless you process an isa transfer with your new provider. Again just throwing ideas here.

Bigwheels1111

You wife could get 6k in Interest before paying tax
£12,570 earning
£ 5,000 starter savings rate
£ 1,000 tax free savings.

eskbanker

GN_TDCI said:

Debt includes Catalogues and Credit Cards, and 2x cars on finance. As the finance on the cars is fixed, there's little to no point clearing them off. 

In relation to the short-term debt, it's a case of seeing what happens if the balances are cleared then saved, versus saving whilst maintaining slightly elevated repayments in a more focussed approach.

You might want to have a conversation with a mortgage broker or two about the impact of debt on your mortgage prospects, which may lead you towards a preferred option....

Perksy5 said:

P.S it may be worth looking at a cash lifetime isa vs help to buy. When they were first introduced it was more beneficial for me to go down lifetime isa route instead of help to buy isa. There's great articles on comparing the two on MSE.
Id also be aware that if you've paid into a help to buy this calendar year I dont believe you can pay into a lifetime cash isa until next tax year unless you process an isa transfer with your new provider. Again just throwing ideas here.

I agree that a LISA is worth considering, especially with the £4K/year contribution limit, but it's a different type of ISA so could be funded alongside a HTB ISA in the same tax year, although it isn't possible for each person to use the bonuses from both towards the property purchase, so each person needs to commit to one or the other.

enthusiasticsaver

Any outstanding debt will impact on mortgage finance so I would address that whilst saving for a deposit. 

Catalogue debt is normally expensive so I would get shot of that straight away.  I am not sure what sort of car finance you have but unfortunately a lot of people over extend on this so I would make sure you are getting value out of these deals.  PCP is the most expensive way of buying a car and leasing obviously means you never gain the asset and are paying a considerable amount for the privilege of driving around in an expensive car.  Most HP deals will allow overpayments. 

Maximise ISAs but really with interest rates as low as they are and presumably as your current savings are presumably low I don't think you need worry about going over the £1k limit. 

GN_TDCI

Thanks everyone.

Yes, we have HP Finance on the cars. Both HP balances are less than the value of the car right now, and as that's against a fixed asset I will consider these to be lower risk versus the other debts.

I have listed the debts, the balances and the regular payments to them and totalled up the amount we are paying out to these. My aim now is to maintain that level of repayment by putting everything I call 'variable' (debts such as credit cards, catalogues, etc. which are subject to monthly interest) on minimum payments, and maintaining the 'fixed' debts (HP/Load Repayments with a set monthly fee) as they are.

The amount that we currently pay to debts to be maintained with the residual thrown into high APR debts to clear them off as quickly as possible. Being honest, I will try to clear some of the lower value debts too in order to give us some inspiration, as we have a few which are sub £500 which will make us feel like we're achieving if these can be cleared off quickly.

I plan on maximising the input into the Help2Buy ISAs as this gives us the best return on savings (25% boost from the Government).

I need to put into a spreadsheet what the end result will be by focussing on clearing debts vs saving, as convincing my wife that sacrificing the savings at the start would have longer-term benefits.

We are also selling things to raise revenue which will help to reduce debts too, giving us a boost at the start, and we have discussed looking at other income streams, even temporary, to support getting the debts down and savings up.