Wealth Check: 'How can I save for a house deposit?'
With a tiny debt and fledgling savings, an analyst is now planning to buy a home, but she mustn't lose sight of her retirement needs, say advisers
Sunday 19 August 2012
Antonia Schoeneich has just returned from a four-month spell in Egypt, and is now keen to save up for a deposit on a house in England.
The 28-year-old from Watford works as a compensation and benefits analyst, earning £34,500. "I had to resign before I left to go away from this January until May," she says. "But I was lucky to be able to get my old job back when I returned."
Since July, Antonia has rented a room in a shared house. "I pay £480 per month including bills," she says. "But I'm really keen to buy a place, and know that if I'm going to do so on my own, I'll need to save a sizeable deposit to ensure the monthly repayments are affordable."
Antonia has been disciplined about putting money aside in recent years, and has several savings accounts with HSBC. "I like having different pots of money for travel and shopping," she says. "I also have £6,000 in cash individual savings accounts (ISAs) with Barclays and the current rate is 3.05 per cent; my Isa savings are set to go towards my house deposit."
She is also in the fortunate position of having only a small amount of debt. "I worked hard to pay off all my debts before going to Egypt, and the only one outstanding is £100 on an HSBC credit card," she says. "This will be paid off in the next few weeks."
At present, Antonia has no investments. "I have never bought shares, but am interested in investing for the longer-term – and potentially to help towards the house deposit," she says.
As Antonia will only qualify for a defined contribution pension from her employer after her first full year of service, she has a stakeholder plan with Legal & General. "I'm not getting employer contributions at the moment, but this will happen once I qualify," she says. "For now, I am focused on saving into an Isa for my deposit than on saving for retirement."
In terms of protection, Antonia's employer provides a life assurance and a long term disability plan.
Our panel of independent financial advisers agree that Antonia has adopted a sensible strategy by paying off her debts and is in a good position to start saving for a deposit. They also agree that while her priorities are saving for the short and medium term – and getting onto the property ladder – she can't afford to ignore retirement planning.
Plan your budget
Keri Carter from Broadway Financial Planning suggests Antonia use a budget planner to work out her finances more clearly, and establish how much she can put aside for her house deposit. A useful budget is available at Moneyadviceservice.org.uk/en/tools/budget-planner.
She also urges Antonia to build up a rainy day fund. "This should be equivalent to at least three months' essential expenditure," she says.
Get onto the property ladder
To work out the size of the deposit she will need, Antonia has to have a good understanding of the type of property she wants, where and how much it will cost, says Patrick Connolly from AWD Chase de Vere.
"She can then get realistic about how much she will need to save, and over what time period," he says. "She will also understand how much she will need to borrow, whether this is viable, and how much her monthly mortgage payments might be."
Given the state of the mortgage market, Ms Carter urges Antonia to squirrel away the biggest deposit she can. "The higher the deposit, the more flexibility you are likely to find available to you – and the more competitive the interest rate," she says.
David Brunning from Brunning Newman Houghton Ltd suggests that Antonia could consider buying a share in a home with a Housing Association. "She could buy a proportion of a house, with a lower deposit and more affordable monthly repayments ... then buy more of the house as her reserves and surplus allow."
Saving for a deposit
The best way to save for a deposit is likely to be through cash savings, as her money will be safe in absolute terms, and available when she needs it, according to Mr Connolly.
"Antonia is adopting the right approach by saving through cash Isas, as all interest is tax-free," he says.
Mr Brunning adds that Antonia should ensure her money is working as hard as possible for her by checking the rate on a price comparison site such as Moneyfacts.co.uk.
"Antonia's latest Isa paying 3.05 per cent is competitive and so she should look to use the full £5,640 annual allowance. However, it is likely she can better the rate on the Barclays Isa she took out in the 2011-12 tax year," he says.
"If she wants to retain instant access, Manchester building society is offering 3.06 per cent for Isa transfers. If she is prepared to have less flexibility in pursuit of higher rates, West Bromwich building society is paying 3.18 per cent with a 60-day notice period. "As both rates include a bonus for 12 months, Antonia should keep a note in her diary to move her money again in a years' time."
Ms Carter adds "I would urge Antonia to avoid tying up her money for more than two to three years, in case interest rates do rise, and she misses out on this increase."
Investing in shares
If Antonia believes she can fund her mortgage deposit within 10 years, shares probably aren't a suitable option – and she should stick with cash savings, according to Mr Connolly.
"She shouldn't take the risk of not being able to achieve her target because she has invested in investments which have fallen in value," he says.
Mr Brunning agrees that short-term share investments are always going to be a high-risk strategy. "I would only recommend investing in shares where there is the expectation of holding the investments for at least five years," he says.
Equally, if Antonia is willing to invest for five years to build her capital – and prepared to accept the associated risks – the first port of call is an investment Isa into which she can save up to £5,640 annually, he adds.
Ms Carter recommends Antonia look at collective investments rather than shares. These are pooled groups of shares or funds, such as unit trusts and investment trusts.
"These generally provide diversification of risk – thereby reducing volatility," she says.
Planning for retirement
Antonia needs to address her longer term needs, such as pension saving as soon as she is eligible for her employer's scheme, says Mr Connolly.
"I would strongly advise her to invest as much as she can afford into this pension," he says. "The money she invests now has the best opportunity to grow; in Antonia's case, she may have around 40 years until she reaches state retirement age."
Review protection policies
As Antonia is single, has no dependants, and no significant debt, she has limited need for most protection products, says Mr Connolly.
"But, she should find out exactly how the long term disability plan offered through her employer works," he says. "She should also see if there are any shortfalls which may need to be addressed."
Mr Brunning suggests she may want to consider critical illness cover to protect her independence.
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