Monday, 15 February 2016

The Difficulty of Saving for Your Child’s House Deposit

When conversing with the older generation, it’s interesting to see many of them shaking their heads at the difficult circumstances facing young families in the UK today. For them, owning their own home was by no means out of reach, and actually a given for much of the middle class; even in London.


Today, it’s a very different story. I thought it was appalling to read that those in England who purchase their first home this year will have coughed up nearly £53,000 in rent, and for those who start renting now the figure will escalate to £64,000.

So it’s tough enough for our generation to get onto the housing ladder. The problem for a young parent is that things seem to be getting worse, rather than better, and it’s a massive worry for our children in the future. Politician after politician professes to have a solution, but as the number of zeros on the end of frankly ordinary houses continue to be added on, credibility on their part dwindles.

In fairness, the Help to Buy ISA is a good initiative, and, if you play your cards correctly, you’re basically benefitting from free money to the tune of £3,000 over a period of as little as four years. But such an amount is increasingly being dwarfed by the absurd inflation levels in the housing market, and does nothing to fix the problem at source.

Using peer-to-peer lending to save for a deposit

The other big difficulty for those of us who save up is that interest rates are absolutely woeful on savings, and even the returns for cash ISAs are derisory these days too. Quite simply, the inflated costs of house deposits is outsprinting returns on saving, but gambling on the stock market is hardly that enticing at the moment either. Even for experts!

So it’s interesting to note the rise of a middle ground between the two in terms of risk and reward – namely, peer-to-peer lending. This involves committing your money to an online platform, who match it directly with fellow consumers who need a loan. Unlike a bank, money you lend is allocated to a borrower on a one-to-one basis in terms of pounds, and the streamlined online process means that you’re able to benefit from interest returns of around 6% per year, depending on how long you wish to lend for. What’s more, from April, lenders will be able to shield their interest from tax courtesy of the new Innovative Finance ISA.

The obvious concern is when the borrowers default on the loan you are allocated, and with there being no cover from the Financial Services Compensation Scheme, you could be left exposed. However, platforms counter this with significant measures.

Firstly, they are obliged to adhere to very strict standards when it comes to approving borrowers based on their credit ratings. More importantly, they are also obligated to keep a segregated reserve fund in place to cover any borrower arrears and defaults. And the track record is impressive too, with no lender having lost a penny through any of the major platforms since reserve funds were introduced five years ago.

Some food for thought

Is peer-to-peer lending the miracle cure in saving up for your child’s house deposit? It has certainly become a viable option. Investing is such a personal decision, and interpretations of risk and reward are very subjective, but it’s good to know there are alternatives out there to being fleeced by banks.
The financial future for our children is looking increasingly insecure, and it would be great if our well-paid politicians could do more to find a solution to the housing crisis. Nevertheless, all we can do as parents is to take care of things on our end, and that means to get planning and saving as soon as possible.


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