Wealth Check: 'How can I climb onto the property ladder?'
Olly Pickard is 23 and wants to set aside enough money to put a deposit on a house in the next five years. Oh, and he has a student debt of £26,500
Sunday 18 September 2011
Olly Pickard is keen to set aside enough money for a deposit to get a foot on the property ladder in the next five years. The 23-year-old works in accountancy and earns £25,000 a year. He rents a room, for £600 a month, in a shared flat with one other friend in Twickenham, south-west London.
"Ideally, I would like to get on to the property ladder soon, as I see rent as money down the drain, but I can't afford to buy a house at present," he says. "I also wonder when is a good time to get on to the ladder."
After leaving university a year ago, he is burdened by debt, with £26,500 in student loans to repay. "I envisage repaying this over a long period of time as it comes out of my salary each month," he says.
He also pays around £200 a month for a four-year £7,500 car loan with Nationwide at 7 per cent. And while he uses credit cards, he makes sure to pay off the balance on these each month.
"In the short term, I would like to support my lifestyle and add to my savings so that I am in a position to buy," he says. "Beyond that, investments are of interest – but the main priority is to have enough money to be able to get a first home."
Olly has managed to squirrel away some savings, and has £5,000 in a Nationwide individual savings account (ISA) paying 2.75 per cent.
"I don't feel that I make the best use of my savings, with the ISA getting a marginally better rate than elsewhere," he says. "If I had the time to research I would like to put the money into a longer-term bond or investment."
Looking to the longer term, Olly does not yet have a pension. "I haven't contributed to my pension in my first year of working as I wanted to work out how much money I have on a monthly basis," he says.
"I plan to join the defined contribution company pension scheme soon and contribute about 5 per cent of my salary for the first couple of years – but is this sensible?"
Olly is in a reasonably good financial position for his age, says Martin Bamford from the independent financial adviser (IFA) Informed Choice.
"He is on a decent starting salary and had a clear objective in terms of property purchase, and he should be able to create a defined financial plan which will see him through the next five to 10 years," he adds.
As a priority, Olly should consider repaying the car loan early, if he can, before allocating money to savings and other financial objectives, says Mr Bamford. It will be costing him more to service this loan than he will be able to earn in interest on his savings – and he has money sitting in an ISA that could be put towards wiping out the debt.
"However," adds Duncan Carter from IFA Clearwater Financial Planning, "it makes sense to continue paying down the student loan gradually out of salary."
Savings and pensions
Olly should spend a month writing down where his money goes to help him see where savings could be made, say the advisers.
If he is prepared to do so, developing a budget will help him focus on his main goal – building up enough of a deposit to get a mortgaged property of his own in the next five years.
While Olly has the option of transferring his cash ISA into a stocks-and-shares ISA for a longer-term investment, timing this move is tricky, warns Bob Hair from wealth management firm Turcan Connell.
His first step into the stock market is best taken after he has bought a property. In the meantime, sites such as moneyfacts.co.uk will help him find out which are the best rates on the market for cash ISAs.
Savers can now save up to a maximum of £5,340 per tax year into a cash ISA, and they should shop around to find the best deal.
Olly should continue to save, but keep an eye on the rate of interest, and be prepared to transfer this to a different provider if the rate falls significantly.
At 23 years of age, Olly doesn't have to rush to open a pension, says Mr Bamford. However, as his employer is offering to contribute, this will give an early boost to his pension pot.
"Ideally he should contribute around 15 per cent a year of salary, including his employer's contributions, but whatever happens he needs to start somewhere," says Mr Hair. "Around 5 per cent is a pretty good start, but he should plan on increasing this in future years."
Buying a property
There is never a right or wrong time to get on to the property ladder, if you view it primarily as a home rather than as a short-term investment, says Mr Bamford.
"Residential property tends to go up in value over the longer term and it is usually better to spend money on mortgage repayments than money on rent."
However, Olly shouldn't be too disparaging about renting in the short term, stresses Mr Carter. "Over a 25- to 30-year mortgage period, you pay for your home several times over, so it isn't always the great investment it is often heralded to be – but I do understand the sentiment."
To make his five-year target for becoming a property owner a reality, Olly should start to consider the type and value of the property he wants to buy. "It also makes sense to research the mortgage market to find out what size deposit he might need and what the monthly costs would be," says Mr Bamford.
"While much will change over the next five years, this will at least give Olly a good starting point for defining a savings strategy."
To access a reasonable deal, Olly will need to amass a deposit of between 15 per cent and 20 per cent of the property's price.
As to whether now is a good time to buy, there remains a wide gulf between house prices and earnings, and the days of cheap and easy credit which fuelled the house-price bubble are a thing of the past.
Ultimately, Olly will probably only know whether he climbed on to the property ladder at the right time many years after he takes the plunge.
"But what we do know is that, with property prices back to 2007 levels, there are lots of good value properties out there," adds Mr Hair, "so it should be a buyers' market."
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