How the Stamp Duty holiday could help you for years to come…

There is little need for additional commentary on the Chancellor’s Stamp Duty holiday which is grabbing the headlines this week. For those who have not already heard, full details of the changes and the new rates can be found on the gov.uk website.

Whilst much of the coverage in the press has focussed on those who may now benefit by being able to bring forward their move or complete a move which they may otherwise have pulled out of, we are going to have a look at a couple of financial planning nuances and how you might be able to really use the saving to help you for years to come.

Safety First

Financial Planners always talk to their clients about their ‘emergency’ fund. This is the safety net of savings that are easily accessible, not subject to market risk, and can be drawn upon to cover those unforeseen circumstances that place us under financial pressure – which just became more real for all of us!

Usually an emergency fund would be a minimum of 3 months of your household expenditure so if all of your bills and Direct Debits for the month added up to £1,500, you should have at least £4,500 in instant access savings. For most people who have been saving to buy a house and pay Stamp Duty, being able to set aside such a sum is likely to seem unaffordable or at the very least a barrier to achieving your other goals.

This holiday may be a rare opportunity to set aside money already saved to provide a safety net if you ever need it in future. We often get asked whether it is sensible to have so much money set aside and ‘earning next to nothing’ because of the low interest rates offered on instant access savings.

We would always encourage clients to maximise returns on cash, the NS&I Direct Saver or Direct ISA can be a good way of doing this, but we also encourage them to realise that the value of these savings is in the financial security that they give you, not the returns that they provide.

Compound Benefits

Many articles around Stamp Duty holiday have focussed on people who are going to bring their purchases forward or, for those with a purchase already in progress, people who are going to spend the cash improving their new property or (as the chancellor wants) kickstarting the economy by going on holiday, eating out or spending on the high street.

The holiday lasts until March 2021 so for people who already have purchases in progress or plans to buy before then, consider holding your existing timescales and using the tax saving to enhance your deposit. The saving could be as much as 3% of the purchase price for properties at the very top end of the range and adding this amount to your deposit would have over the lifetime of the mortgage.

Example

If you were moving home and had set a purchase price of £300,000 with a £55,000 deposit, you would have paid £5,000 in Stamp Duty under the old rules.

  • Adding this £5,000 saving to your deposit would reduce your loan to value
  • It would take you to the next interest rate band, and
  • reduce your monthly repayments from £1,001.87 to £953.10.
  • If you could afford to and reinvested the difference via overpayments,
  • you could pay off your mortgage 1 year and 5 months early *

 

*Example based on a 25 year mortgage with an initial 2 year fixed term taken with a local building society.

Conclusions

The changes announced offer many people an opportunity to improve their long term financial position if they are willing and able to resist the temptation to do what the Chancellor wants them to with the saving – spend it or use it to buy the same things as intended but sooner.

Want to know more

Contact Ashley King on 01282 452255 or ashley@financialaffairs.co.uk

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