Wealth Check: Buying a home in London: it's the American dream
Sunday 24 February 2008
Finances are tight for 22-year-old Hallie Seltzer. After completing her degree, she moved from her home city of New York to London in June to work for a public relations firm. "I was attracted by the ability to earn in sterling, which is so much stronger than the dollar," she says. "And I love London, as I've studied here before." But with a salary of just £17,500 a year, she finds that the cost of living leaves her with little spare cash.
She is keen to remain in London for the foreseeable future, though, and hopes to buy a flat once she has enough savings. "My most immediate goal would be to make a down- payment on my first apartment by the time I'm 26."
So far, she has just £500 in a Barclays savings account paying 3.75 per cent.
"Unfortunately, almost all my salary goes towards paying rent, bills and groceries," she says. And even once she has managed to build up a deposit, she fears lenders may shy away from giving her a mortgage because of her limited credit history in the UK.
"I doubt anyone would give me a loan, considering I don't have any other assets or much of a job history," she adds.
Hallie pays £675 a month for a room in a two-bed flat in west London.
Fortunately, she doesn't have credit-card borrowings or any other form of debt to contend with.
For longer-term planning, she pays 5 per cent of her salary into the stakeholder pension scheme offered by her employer. She has no protection policies in place.
A large proportion of Hallie's salary is eaten up by her rent, leaving little room for manoeuvre in saving for a deposit. But as her income rises, and with a degree of discipline, she can find some spare money, say our panel of independent financial advisers (IFAs).
As Hallie wants to buy a home in the near future, she should concentrate on cash savings and avoid stock market investments.
Simon Webster from IFA Facts & Figures Planners says she should begin by writing a detailed budget that includes all her outgoings, however small, to identify potential savings.
Even if she can only afford to put by £25 a month, that could be used to set up a standing order to a cash individual savings account (ISA). "After all, it is best to start with a small sum and build, rather than fall behind on savings," stresses Ian Hudson from IFA Hudson Green & Associates.
She should move the money in her Barclays savings account, which is earning a measly sum in interest, into a cash ISA paying tax-free interest. For example, Alliance & Leicester pays 6.25 per cent.
And with good career prospects, Hallie could find that her salary doubles over the next five years, Mr Webster points out.
Hallie can't buy a property in London on her current income, but this may change as her salary rises. To gain access to the best mortgage deals, she should aim to save around 10 per cent of the purchase price. She will need to factor in other homebuying costs, such as stamp duty and legal fees.
Holding a current account and savings account for more than a year, and showing regular deposits and a balance consistently in the black, should help with Hallie's credit score, on which she will be assessed when applying for a home loan.
The mortgage repayments will be lower if she starts by taking out an interest-only mortgage. Stepping on to the housing ladder with a friend is also worth considering, though Mr Hudson warns that problems can occur if one person wants to sell up.
Pension planning is important and the earlier Hallie starts, the better off she'll be, says Arthur Dornan at IFA Cartebar. But she must consider her future plans. If she eventually decides to return to the US, transferring a pension pot could be difficult; she would need to seek advice on this.
She doesn't need life cover as she has no dependants.
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