Wealth Check: 'How can I top up my inheritance and get the key to my first property?'
A recent graduate has a considerable sum put aside, but needs advice on how to maximise her savings
Sunday 11 December 2011
Alice Clark wants to own her own home by the time she reaches 30.
With six years to go to meet her goal, and a lump sum of £35,000 saved, she's got a good starting point from which to build a deposit. "This is an inheritance from seven years ago," explains Alice, 24. "I'd like to explore my options for this. It's currently in a Santander account paying 2.75 per cent."
There is little scope for Alice to put more cash away, however. She earns £21,000 as a marketing and research executive for a music television company in London. "I've only been earning for about three months so I haven't thought about saving yet, really," she says. "But I imagine I'd be able to set aside a little each month, even if this is a struggle."
Alice rents a room in a three-bed flat for £450 a month in Clapham, south London, which she considers "money down the drain". She would like to buy a one-bed flat somewhere outside London when the time comes, although she remains unsure of where this might be.
"In five years' time I hope to have escaped the expensive life of London," she says. "I want to be in a financially secure place by then."
Fortunately, her only debt is a £5,000 student loan. She says: "I'm lucky to have a very supportive family, who provided financial support during a six-month unpaid internship in London which allowed me to get the job I have now. They have also helped to pay off a significant chunk of my student loan debt."
Turning to investments, she is keen to learn more about stocks and shares. She says: "At the moment I'm considering buying shares in the company I work for, Vintage TV, as it is new and has huge scope for growth and success."
Alice has yet to tackle longer-term financial planning, as she isn't contributing to a pension at present. "I haven't really thought about it, but I probably should do soon," she says.
Alice is in a good financial position, agrees our panel of independent financial advisers (IFAs). She's got a full-time job, with a clear objective in terms of property purchase, a good sum saved, and wants to secure her financial future.
Saving for a deposit
Justin King from financial planner MFP Wealth Management says: "Alice is in a fortunate position to have inherited a large sum of money, so this could go a long way towards a deposit towards her first house."
However, to reduce the size of her future mortgage debt, Alice should work out a monthly budget to see what she can afford to save towards her deposit. Maintaining the majority of her savings in cash will not allow huge potential for growth, but will ensure she has the funds readily available for a deposit on a house.
Turning to her current savings, shifting a portion of these into an individual savings account (ISA) would be a wise move, agree the advisers. She can move up to £5,340 – her annual cash allowance – into one of these tax-efficient accounts, and find the best deal through sites such as moneyfacts.co.uk. Maximising this and next year's allowance would place £10,980 out of reach of the tax man.
If she picks an instant access account she will be able to access the cash. Alice should not commit to more long-term saving arrangements such as stocks and shares until she has decided what to do about buying a property, warn the advisers.
Turning to investing in individual shares, like that of the company Alice works for, Thomas Beckett from IFA Salisbury Financial Services says: "While buying shares in a newly established company may appear tempting, there is a drawback that Alice may risk placing all her eggs in one basket. If the company proves a success, Alice may do well, but if it fails, Alice may end up not being able to fund her first property purchase."
However, Mr King adds: "If she is convinced that the price she is paying for the shares is attractive, they may be worth a speculative punt. She could always dip her toe in the water with a small amount – say, £1,000."
Alice is unlikely to want to lose a chunk of the money she has saved, but investing in the stock market poses this risk. While she may lose out to inflation over the short term in a savings account, the stock market may batter her sum to a greater extent.
Buying a property
Property prices in London are likely to be beyond Alice's reach unless she receives a significant pay rise. "But there are bargains to be had all over the country at the moment, so she needs to think carefully about where to wants to set roots down," says Bob Hair from wealth management firm Turcan Connell.
When she does come to buy, a fixed-rate mortgage will offer her the security of fixed monthly repayments – which, when operating on a budget, is often essential.
There are various options for first-time buyers. Traditionally, if Alice wants to purchase a property, her budget would amount to about four times salary in addition to the deposit. "A minimum 15 per cent deposit should help Alice to access better rates, but the more she can put down, the better," says Mr Beckett.
Her first port of call should be her local housing association. She could be eligible for one of the Government's HomeBuy assisted-purchase schemes which offer loans to those with low household incomes. HomeBuy Direct will help households earning less than £60,000 to buy a property on certain developer sites through an equity loan of up to 30 per cent of the property's value. There's also the New Build HomeBuy, which helps people to buy a share of a newly built property and pay rent on the remainder. More information is available at direct.gov.uk.
Tackling the student loan
Given that the interest rate on student loans is relatively low, at 1.4 per cent, Alice can continue paying this off at the minimum rate. This amounts to 9 per cent of any amount earned over £15,000.
"Alice's family may have helped her out but she shouldn't be in too much of a hurry to repay the rest of her loan given the rate," says Mr Beckett. He adds that it would be inadvisable to pay off the loan from the inheritance. Given Alice's age and salary it would be difficult to build up the funds again to meet her goal of becoming a property owner.
While Alice is only 24 years old it is never too early to start thinking about her retirement and contributing to a pension plan. The advisers suggest that she explore whether her employer offers a pension scheme and whether they will contribute to it on her behalf. "If they do then I would recommend joining it," stresses Mr King.
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