Kate currently lives with her friend Harri, but her thoughts are shifting towards a place of her own. This could be rented, but Kate is keen to find out whether a mortgage is a possibility, and if so, whether she could afford the repayments. Another concern is the deposit, as Kate has very little in the way of savings. One big plus point is that Kate has no loans, not even a bank overdraft. This is impressive considering the nature of her income and will be a positive sign for any prospective lender.
The adviser: Steve Buttercase is a manager at Maddison Monetary Management, independent financial advisers, at 44, High Street, Bagshot, Surrey (01276- 453343 or call 0800 0742233).
The advice: There are two steps to this part of Kate's financial plan. The first is to examine whether Kate will be able to secure a mortgage at all, and the second is to start saving up for the associated costs, including the deposit.
The traditional approach taken by lenders in this country is based on the banking approach. That is to say the amount lent will depend on the security, the person's ability to repay the loan and the lenders "policy" at the time. Kate is a little unusual. Her income is not regular and she would not be able to provide an employer's reference. Also, as she does not have a mortgage already, there is no track record of paying a loan for the prospective lender to check up. This puts Kate in a different market, but there are lenders who will consider lending in these circumstances, subject to a few basic criteria.
For this type of mortgage, called a "Non Status" or "Self-Certification" mortgage, most lenders will be looking for a show of commitment by a reasonable deposit put down on the house. This will normally be 10 per cent or more, although sometimes as low as 5 per cent can be acceptable. They will also require some evidence that Kate will be able to afford the loan. This can be provided by an accountants letter stating that the loan payments are affordable based on recent figures. They may also want to see as many as three years' worth of accounts showing sufficient income to service the loan, although there are lenders, such as Bank of Ireland and UCB Home Loans, which specialise in self-certification and are more flexible on this.
Kate pays rent at the moment. The rent is pounds 350 per month and she feels that she should be able to pay a similar amount towards a mortgage. Once she is on her own there will be lots of other expenses to consider: utility bills, community charge, insurance premiums and general household expenses. This means that a budget must be drawn up to be certain how much she can afford to pay every month.
It is worth remembering that Kate may not qualify for all the first-time buyer deals around at the moment, but if she secures a rate of 5.99 per cent then she could probably afford payments on a mortgage of around pounds 60,000. This means a deposit of at least pounds 6,000.
Then there are the associated costs of buying to consider. These include such nasties as Stamp Duty at 1 per cent of the purchase price if above pounds 60,000, solicitors fees of probably 0.5 per cent of the purchase price plus VAT, any arrangement fees on the loan (although some lenders will add these on to the loan), the fee to have the property surveyed for the lender, and also potentially an indemnity premium which is an insurance taken out by the lender when they lend more than 75 per cent of the value of a property to protect themselves against having to sell for a loss if they repossess.
Sounds terrifying, but in reality it is much more feasible than it appears. Kate's first priority must be to obtain enough money for a deposit and to cover the costs of buying, but she may be able to make savings along the way. This should start at once.
Kate does pay tax, so tax-free savings schemes are a good idea. My advice would be to consider taking out a mini ISA. As Kate does not like risk, this could be a Cash ISA, with a good interest rate, and probably with a bank or building society offering a good return
She should try and save as much as she can afford. This may be hard initially but it will be good preparation for when she is paying a mortgage on her own later. If Kate cannot save enough in time, the only other option is to borrow a deposit, perhaps from family, but this can be potentially very dangerous - debt can quickly mount up and cause problems later. Sometimes a combination of borrowing, saving and adding fees to the mortgage can allow a first-time buyer to get a foot on the property ladder but the most important thing of all is to ensure that everything is comfortably affordable.
One final point is that interest rates are at an historical low, so it could get much harder very quickly unless the loan is at a fixed or capped rate of interest, which prevents payments increasing for a set period of time.
The problem with these fixed or capped schemes usually comes at the end of the offer period, when they revert to ordinary rates. There is also normally a "lock in" period preventing you from changing your lender so check the small print very carefully!