Wealth Check: He bought the home – now for the cushions
Successful as a first-time buyer, Robert Threlfall is seeking the best way to save to secure his finances. By Harriet Meyer
Sunday 22 June 2008
Robert Threlfall, 25, has grabbed the first rung of the property ladder and is now concentrating on building up his savings for a comfortable future.
"The current financial turmoil is making me nervous," he says. "And while I might own my home, I don't have a specific focus for any savings I make, which perhaps I should."
At present, Robert earns £25,000 a year as an architectural assistant, and lives in a one-bedroom flat bought in August last year for £175,000 in the Kemp Town area of Brighton.
He pays around £500 a month for his 25-year £85,000 repayment mortgage, which is on a three-year fixed rate at 4.75 per cent with Nationwide. While he is aware of his luck in securing a good mortgage deal before lenders hiked their rates, he is anxious that he bought at the height of the market.
"Hopefully, as I intend to stay in the property for at least five years, any losses in value will be recouped, so I'm trying not to worry too much about this," says Robert. "And it's in central Brighton, which is a great location, so it should be fairly resilient to falling house prices."
For short-term savings, he keeps £2,000 in a high- interest Halifax current account paying 5 per cent. "I did have an individual savings account [ISA] but decided to use this one instead. My salary is paid directly into it and I start earning decent interest on it straight away."
He also likes to take a punt on the stock market, using a Halifax online share dealing account, which has £2,000 in it at the moment. "I reckon I can potentially make much better gains than in a savings account by playing the market," Robert explains, "although I admit the present conditions are making it tricky to produce a profit."
Despite having worked full-time for around 10 months since he graduated, he has so far chosen not to join his company pension scheme. "But I will try and start paying into it this year."
For protection needs, he pays £11 a month for £85,000 of life cover over 25 years with insurer Bright Grey.
Considering his low mortgage rate, and the fact he has no plans to take on any further debt, Robert is in a good financial position, agree our panel of independent financial advisers (IFAs). But he is right to question his savings strategy, which needs fine-tuning to give the greatest potential for growth over the long term.
Robert's Halifax deal pays 5 per cent a year on balances up to £2,500. While this makes it very competitive in the current account market, it fails to impress as a savings account, since far higher rates are available.
"Also, as a basic-rate taxpayer, he is earning just 4 per cent on any money in this account," says Mike Pendergast from IFA Zen Financial Services.
Calculating how much he can afford to save each month, and putting this into a cash individual savings account, would be wiser. "It will get him into the savings habit, and interest will accumulate free of income tax," says Mr Pendergast.
For example, Egg is currently paying 6.05 per cent on its cash ISA, on a minimum investment of just £1.
For greater long-term growth, he could also save up to £3,600 a year in a stocks and shares ISA.
Danny Cox from IFA Hargreaves Lansdown suggests picking unit trusts from the equity income sector, and recommends Invesco Perpetual Income and Artemis Income as solid funds with good management in place. "A unit trust will typically have between 20 and 100 different underlying shares, meaning that the investment is well spread."
Robert enjoys dipping his toe in the stock market already, with his share dealing account, but he might achieve better returns by investing in a unit trust, which can be bought with little or no upfront charge by using a using a fund supermarket, adds Mr Cox.
However, as a basic-rate taxpayer he is not liable to any additional tax on share dividends, so if he is determined to continue dealing, he is in a good position.
Robert should be relatively unconcerned about the falling property market, agree the advisers.
"He has a high level of equity in his flat, which will act as a buffer in case of further falls, and he plans to remain there for some time," says Dennis Hall of IFA Yellowtail Financial Planning.
And he has managed to secure a great mortgage deal at a rate of 4.75 per cent, which is almost two percentage points lower than the majority of the cheapest deals now on offer. With more than another two years on this rate, Robert should be able to ride out the credit squeeze.
"However, he should make sure to plan for a possible rise in his rate when he comes to remortgage at the end of the term – or he could face a nasty shock," says Mr Pendergast.
To wipe out his home loan as quickly as possible, Robert could set a goal of making regular overpayments. On a standard mortgage, he will typically be allowed to pay off an extra 10 per cent of the loan sum each year.
The sooner Robert begins to contribute to a pension scheme, the better. It is those contributions made in the early years that make the most difference to a pension pot, stress the advisers, because of the effect of compound growth.
"The contributions he makes will attract tax relief, so every £100 he saves will cost him just £80," explains Mr Cox.
Additionally, if his company pays into the scheme on his behalf, Robert is in effect turning down a pay rise by failing to take advantage of this.
As a single person with no dependants, Robert's life insurance is unnecessary, says Mr Hall. A more beneficial form of cover would be income protection, which can replace a salary and meet mortgage repayments in the event that he is unable to work due to sickness or disability.
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