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Uncertainty

With so much uncertainty in the economic climate, the younger generations seem hesitant to buy their first home.

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Government Help

There are many government schemes such as the home equity loan and help to buy ISA attempting to encourage first time buyers onto the market.

With these options available, it seems many people are missing out on property that could be making them wealthy.

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Using The Scheme

For example, the home equity loan allows for you to put as little as 5% down on a property and pay no interest for 4 years on the 20% that the government put down for you.

The average house price in the UK is around £240,000, meaning you would need £12,000 for an average house. You’ll then have legal fees, maybe £1500. However, the government have even allowed for first time buyers to pay no stamp duty on their first buy up to £300,000, one less thing to worry about.

This means that for essentially £13,500, you have the benefit of a £240,000 asset and be on the property ladder. There are more intricacies with the home equity loan, however we won’t get into those here.

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The Benefit

Let’s now assume that house price inflation is 3% per annum over the next 4 years. The house will be worth £270,000 after this period. You would have made £30,000 in 4 years, just by living in a house. An incredible return on £13,500.

This is essentially the cost of putting off buying a house. You could get the inflationary benefit of a real and expensive asset, while putting down a fraction of the price.

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The Costs

We would have to consider the cost of borrowing however, £30,000 in 4 years is a little too good to be true. The government loan will have no interest for these first 4 years. However, the remaining 75% of the home’s value will require a mortgage.

At the time of writing, an interest only loan in these circumstances, fixed for 5 years, can be obtained from Halifax at 1.97% interest, that is with no product fee. This equates to £14,184 over 4 years.

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So our profit is around £16,000 for buying your first home. However, we haven’t considered the rent one would otherwise pay if they weren’t to buy a home, so it can be a little more lucrative than the measly 118% return over 4 years.

The Other Option

The other option is to carry on saving the money in your bank, however I suggest you read Why Saving Will Make You Poor before you do that. If you utilise these posts be sure to subscribe to our mailing list here.