It can take years for many people to save up enough cash to get on the property ladder – so what if there was a way to dramatically cut the time it takes to raise a deposit, perhaps down to as little as a couple of months?
Such a scheme does exist in the UK. It is called StepLadder and it allows people to team up with other aspiring first-time buyers in a sort of savings club. Everyone regularly pays in the same amount and each month one member is picked at random and receives all of the cash in the pot, which could be the full amount they need for their deposit.
Needless to say, there are plenty of strings attached to this scheme. There are risks involved, the fees you have to pay are not insignificant, and you are tied in – this is a financial commitment that must be repaid, like a loan.
Also, because of the way it works, there could be an impact on how much you are able to borrow for a mortgage.
StepLadder officially launched in the UK at the start of 2019. London accounts for about 60% of its members but it says there are “clusters” in Birmingham, Leeds, Manchester and other urban areas. Membership is in the hundreds, although it claims to be growing fast.
Technically, this counts as peer-to-peer (P2P) lending, where individuals lend to and borrow from each other directly. StepLadder is an appointed representative of a firm called More Lending Solutions, which is regulated by the Financial Conduct Authority for P2P lending.
The way StepLadder works – a sort of combined saving and borrowing arrangement – may seem odd to many people in Britain but in numerous countries around the world this is a fairly common way of financing big-ticket purchases.
For example, in Brazil these sorts of schemes are called consórcios, and lots of people use them to buy a car. It is also a popular model in parts of the Caribbean.
StepLadder puts its members into small groups called “circles”. Every member pays in an identical amount – usually ranging from £25 to £1,000 – each month via direct debit over a fixed period of, typically, 10 to 20 months.
The contributions go into a central pot and there is a monthly draw to decide who receives it. This process is repeated until everyone has received their deposit money.
Let’s say you want to save £20,000 for a deposit. You might be put into a circle totalling 20 people, each saving £1,000 a month. Each month the whole pot (£20,000) is awarded to one member. You remain tied to the scheme until everyone has received their payout.
In the above example, if you were picked first, you would have raised your deposit in a fraction of the time it would have taken if you had been saving alone – but you would have to keep paying your £1,000 a month until the end of the 20-month term.
One plus of this scheme is that it can give you a valuable time advantage, particularly if property prices are rising. Even if you end up being the last member to get their deposit, it won’t have taken you any longer than if you had saved the same amount each month on your own.
But being an early “winner” could have its downsides. The ongoing commitment of having to continue paying into the circle could affect how much you are able to borrow for your mortgage, as a lender could factor that into its affordability calculations, says David Hollingworth of the broker L&C Mortgages. “That could put a slight dent in the mortgage amount available,” he says. “However, those with good affordability but a lack of deposit could still find themselves in a position to buy sooner than they otherwise could.”
StepLadder says that, to date, “we haven’t seen members’ mortgage offer amounts meaningfully impacted by their remaining commitment to us”. It says that when a member is ready to obtain a mortgage, the sum of the remaining payments appears as an unsecured debt – for example, if they had six months left of a 20-month commitment to pay £1,000 a month, that’s £6,000. “Like any other amount owed – ie car finance, credit card balance, overdraft – these repayments will factor into each lender’s appetite differently.” it says.
StepLadder members are not covered by the UK’s Financial Services Compensation Scheme (FSCS), so your money is at risk.
And there are fees to pay, which vary based on the size of the circle but are between 3-5% of the monthly payment amount.
There are measures in place to prevent people simply walking away after they have received their deposit money. StepLadder’s small print says it “will have rigorous collections processes for the recovery of unpaid monthly direct debit payments by customers”.
However, StepLadder says its arrears rate is “ultra-low”. And it adds that if you are yet to be picked in the draw and your circumstances change, you can drop out, thereby ending your commitment to make further payments, and get your money back at the end.
Some people may feel this all sounds a bit strange. However, in a blogpost, StepLadder said that with “rotating savings and credit associations” (ROSCAs) – the technical name for this arrangement – circles are not reliant on recruiting new members in order to keep going. It added: “This is why, emphatically and demonstrably, ROSCAs are not pyramid or Ponzi schemes.”
Raising a £10k deposit in six months
Adebiyi Olusola, a self-employed consultant project manager, had struggled to save up the large sum needed for a deposit. “On the scale of one to 10 of the savings I needed, I couldn’t even get to level two by myself,” he says.
Olusola, who lived in Peckham, south London, signed up with StepLadder and was put into a circle of 25 people, each paying in £400 a month. After six months, having contributed £2,400, his name was drawn and he received £10,000.
Although he had to keep paying in for another 19 months, he was able to use the payout, plus savings, to put down a deposit on a three-bedroom house in Kent at a far earlier stage than if he had been trying to raise the deposit alone.
Other ways to get a deposit
One of the toughest tasks facing would-be homeowners is raising a deposit. What are the options if you are struggling to save?
A handout from the bank of mum and dad Financial assistance provided by parents, grandparents, etc will help some cash-strapped first-time buyers get a deposit together. This sort of help is called a gifted deposit. The borrower will typically have to prove the money is a gift, without expectation of repayment, and definitely isn’t a loan. “A gifted deposit letter is usually all that’s required,” says the Mortgage Advice Bureau, a broker. Be aware that if the person who gifts you the money dies within seven years, you will have to pay inheritance tax on it. Also, some lenders, such as Nationwide, have clamped down on financial gifts from parents and others.
So-called guarantor and family assistance deals There are a number of mortgage schemes that may be able to help. With Lloyds Bank’s Lend a Hand 100% mortgages, no deposit is required – instead, a family member puts 10% of the purchase price into a three-year fixed-rate savings account to act as security. But at the time of writing, the bank’s website said these deals were “temporarily unavailable for new applications”.
The very similar Family Springboard mortgage from Barclays is still available. Again, you don’t need a deposit – you can borrow the full purchase price because your helper (who can be a family member, friend or loved one) provides 10% as security, in this case for five years. The money sits in a Barclays Helpful Start savings account.
Meanwhile, a deal that lets buyers borrow up to 95%, with a family member assisting with affordability, is available from the Essex-based Saffron building society. With this so-called joint borrower sole proprietor (JBSP) mortgage, the owner borrower must be able to afford to cover a minimum of 70% of the total loan, while the supporting borrower – who has to be a close family member – must meet affordability on the shortfall (that is, up to a maximum of 30%). All borrowers will be “jointly and severally liable” for the monthly mortgage payments and the total sum borrowed.
There’s also Tipton & Coseley building society’s Family Assist mortgage, which lends at 100% loan-to-value and involves a family member accepting a 20% charge on their own property or putting 20% of the amount being borrowed into a special savings account.
Rent-to-buy schemes Rentplus is probably the leading provider of rent-to-buy housing, where you typically pay a reduced rent on a new-build home (perhaps 80% of the local market rent) for five to 20 years and save for a deposit to buy the property. It partners with housing associations, and many of its applicants are key workers who often can’t afford to save up a deposit because their rent and outgoings are too high. At the point of purchase, tenants are gifted 10% of the property’s market value to put towards a deposit.
Do you feel lucky? Cambridge building society has launched a scheme called Rent to Home that will provide one successful would-be first-time buyer (chosen via a ballot) with a newly refurbished home owned by the society that can be rented for up to three years, after which 70% of the rent paid is returned to the tenant to be used as a deposit for a mortgage. Applications are due to close on 30 October.