Child trust funds could sock away cash for first home

Child trust fund (CTF) cash could transform the market for first-time homebuyers with young people using their lump sum as the deposit on their first home, enabling them to get on the property ladder at a much earlier age.

CTFs could provide a £2.4 billion a year boost to young people’s spending power after the first mature in 2020, research carried out by Social Issues Research Centre (SIRC) for The Children’s Mutual says.

Calculations from Children’s Mutual reveal that although the average first time buyer will probably require a deposit of £18,800 to buy a home by 2020, a fully topped-up CTF might provide a cash lump sum at maturity at age 18 of £37,100. This assumes that the full £1,200 a year allowable top up is added to the CTF and the investments show an average return of 7% a year.

But when asked what they would do with this money, young people ranked buying a home third – behind continuing to save and paying for university education. The CTF generation could leave university debt-free. However, the SIRC is predicting that as the value of a degree wanes, children might have to spend longer in higher education, taking a post graduate course to improve their job prospects.

With university looking less attractive SIRC is predicting a rise in the number of young entrepreneurs, with one in five young people saying that if the CTF had existed today, they would have started their own business.

‘Seven out of 10 of today’s children expect to go to university, graduating with a debt of £12,000, while the cost of a deposit for a house rose 450% in the 10 years following 1995,’ said David White, chief executive of Children’s Mutual.

‘For parents with children aged five and under, topping up their Child Trust Fund and inviting grandparents and other family members to do the same is a potential solution,’ White said.

Clearly many parents are doing this. Children’s Mutual which has 20% of the three million CTF market reports that over half of all CTFs opened receive top-up payments from friends and family.

Engage Mutual, also a big provider of CTFs, reports a similar savings habit developing. January is the most popular month of the year for parents to open Child Trust Fund (CTF) accounts – possibly as parents seek to find a home for cash Christmas present given to children.

Of CTFs opened with Engage Mutual almost 12% were opened in January, far more than the monthly average for the rest of the year. The number of parents opening a CTF in November is almost half the January figure.

Despite January being the most popular month to open a CTF it came middle of the league in terms of the proportion of CTFs opened with regular monthly top-ups. The highest proportion of CTFs with savings paid by a direct debit was opened in June.

The most popular month for one-off payments was March, when many workers receive bonuses at the end of the financial year. Overall the amount of people topping up children’s CTFs in 2007 increased by 40% from 2006, showing that the appetite for saving for the nation’s children is growing.