Originally published in the Sunday Times on July 1st 2018, by Kate Palmer
Shaan and Yasmin Ahmed, both 27, are hoping to buy a three-bedroom detached house in West Yorkshire by the end of the year, expecting it to cost between £200,000 and £250,000. Like many millennials, they have struggled to save enough for that all-important deposit.
After two years of hard graft, the couple have amassed £15,000 in cash and investments. Shaan even moved back to his family home in Leeds to escape renting in London. But he said their efforts were “still not enough” to reach their goal of a 10% deposit — so they have turned to a novel scheme to plug the gap.
“I was scrolling on Instagram and came across Stepladder, which said it could help me get my deposit faster. I thought the idea was interesting,” said Shaan, who works in property investment. In December he joined a “rotating savings and credit association” or “Rosca” with 11 other people.
Stepladder — which was given Financial Conduct Authority approval last year but is not covered by the Financial Services Compensation Scheme (FSCS) — has adapted an idea that is popular in Caribbean communities and in Africa and Asia, as a way of helping first-time buyers trying to save for a deposit.
It works like this: Shaan and 11 others each pay £1,000 into a pot every month, and every month one person from the group is randomly selected to receive the total. Once you have been chosen, you have to continue to pay in, so everyone eventually gets the full £12,000 — and everyone but the final “winner” gets their hands on the money earlier than they otherwise would have done.
Three months after he joined the scheme, Shaan’s name came up. “Now with our deposit in hand, we can find somewhere we really want,” he said. Stepladder is in its pilot phase and so far has just 22 people, including Shaan, making contributions in similar groups. But the company said 450 people had applied to join, most of them aged under 35. The challenge is to match people who have similar savings goals, and who can deposit the same amount of money over the same time-frame.
The scheme describes itself as a “collaborative deposit solution” rather than a savings account. Members do not receive interest on their money, and Stepladder charges fees of 3%-5%, although the last person to receive their cash has these charges waived.
Money paid in is held in a client account with Barclays, separate from Stepladder’s operating funds. To stop people running away with the cash once they win the draw, Stepladder holds onto the money until contracts are exchanged on the property; it is then paid via the buyer’s solicitor. Any “winner” who refuses to go on making the regular payments once they own their home may face court action and debt collectors, as if they had defaulted on an unsecured loan. The company said another bonus is that members get a discount on solicitors and surveyors arranged through the firm.
“Our mission is to fix a broken system for generation rent,” said Stepladder’s founder, American-born Matthew Addison, who first developed the idea when he was working on his master’s business degree in 2006 at Pennsylvania University, before starting a career in asset management in the City. “Home ownership rates for young people have collapsed: you need to think outside the box.”
Addison has been advertising the firm on social media and the London Tube, and was signing up new members: “We have lined up a new group paying in £500 a month over 20 months, which should be up and running this summer.”
Despite Addison’s enthusiasm, others are sceptical. “It seems like a strange model to me,” said Ben Yearsley, director at the advisory firm Shore Financial Planning. “You don’t gain anything except time, as you still need to pay in even if you get lucky and ‘win’ on the draw.
“I wonder whether people are using it without understanding what it is — thinking they are getting something for nothing.” Yearsley expressed concerns, in particular, that the obligation to continue to contribute to the scheme could complicate attempts to get a mortgage.
Stepladder says it carries out affordability checks to make sure anyone who signs up can make mortgage repayments on top of any remaining contributions to their group. It also claims to have deals lined up with big high street lenders, although it declined to name these.
Raising enough money for the down payment required by mortgage lenders — variously estimated at anything from £25,000 to £50,000 — is a challenge for would-be first-time buyers. Last year 363,100 had mortgages approved, down from about half a million in 2000, according to the industry body UK Finance.
A number of start-ups have stepped in to appeal to cash-strapped millennials. They include savings apps, such as Plum and Chip, which use “open banking” rules to access your accounts, track your daily spending and automatically hoard your spare money into a savings account.
There is also the help-to-buy Isa, launched in 2015 by George Osborne, then chancellor, to give “direct government support” for generation rent. It pays a 25% bonus on every £200 saved a month, up to a maximum bonus of £3,000 per person — though two first-time buyers can combine Isas for a maximum of £6,000.
Last year saw the launch of the Lifetime Isa (Lisa), which pays 25% on £4,000 a year, although an individual can only use the bonus from one Isa. You must be aged 18-40 to open one and can save until the day before your 50th birthday, bringing the maximum bonus to £33,000.
If you do not use the bonus to fund a house, you can get your hands on it once you’re over 60, or at any age if you are terminally ill. If you withdraw earlier, or without buying a house, you pay a 25% penalty on the bonus, cash and interest.
Growing numbers are also looking to their parents for help raising a deposit. The average parental contribution for homebuyers in 2017 was £21,600 — but that is expected to drop to £18,000 this year, according to analysis by the insurer Legal & General and the Centre for Economics and Business Research.
An estimated 27% of homebuyers — about 317,000 — expect to receive help, up from 25% last year, making the Bank of Mum and Dad a “prime mover” in the British housing market, the study found.
Lucy is Co-Founder and COO of StepLadder. She is passionate about health and fitness, and being a PANK (Professional Auntie No Kids!). She is a trained executive coach and loves cheerleading people towards their goals!