CASE NOTES - AMY CUTHBERT
Annual income: £30,000 to £35,000
Living expenses: £800 a month
Travel expenses: £120 a month
Holidays: £2,000 a year
Regular savings: £200 a month
Amy Cuthbert is planning her first step on to the property ladder. "I have worked in the advertising industry for more than five years and have recently saved enough money for a deposit becuase I’m fed up with renting," says the 28-year-old, who lives in London. "Should I take a tracker or a fixed-rate mortgage? I fear that if I take a tracker, the interest rates will go up. But I don’t want to take a fixed rate and then see low tracker rates continue."
She is also worried about leases. "Many of the properties I have been viewing need a lease extension, which varies in cost. I’ve read that if you remain in the property for two years then you can extend it for an additional 90 years. Should I wait for this? Or should I extend it immediately, which would mean only extending it to 99 years?"
This week’s advisers are Lorreine Kennedy, of CareMatters; Duncan Carter, of Clearwater Financial Planning, and Robert Forbes, of Plutus Wealth Management.
Should Amy take a fixed-rate or a tracker loan? "At present, fixed-rate deals are higher than tracker deals but there are a number of advantages to fixed rates," says Kennedy. "A fixed rate will provide you with certainty and allow you to budget each month – this can be very useful if Amy’s income and expenditure are tight.
"Tracker deals are attractive right now as they represent the lowest rates. That is fine while rates are stable but if rates rise then Amy could be under considerable financial pressure," she adds. "A 1 per cent increase in interest rates will have a marked on monthly payments. If the idea of that keeps you awake at night, then it is likely that a fixed rate will be the best option for Amy."
Carter says: "For many people, having certainty is of importance and some will accept the potentially higher rate under a fix as a price worth paying to ensure their outgoings are certain for a known period."
However, he warns of the potential problems when the fixed rate ends, adding: "Many people in the past borrowed far too much on low fixed rate deals and are now finding their lender’s standard variable rates to be significantly higher than the fixed rates they enjoyed."
For that reason, Amy should consider longer fixed rates, advises Forbes. "If Amy is going to buy a place, she should look at getting the longest fixed rate possible," he says. "A two-year fix may cause problems because 24 months from now Amy may find interest rates – and therefore her repayments – much higher, so ideally a five-year fixed rate would be best."
Extending property lease
There are several factors to think about when considering extending a lease, says Carter. "These include the value of the property, the remaining length of the lease, how long you intend to stay in the property, and the current level of ground rent," he adds. "The term of lease will be an issue for a lender who will generally not grant a mortgage where there are fewer than 60 years remaining."
He says Amy should be aware that the length of the remaining lease will affect its future value. "This is an area where specialist advice should be taken once you have decided upon a property. One scenario to avoid at all costs is getting into a dispute with the landlord that might end up at a Lease Valuation Tribunal, as this is both time-consuming and expensive." For more information, he recommends the Leasehold Adviser Service at www. lease-advice.org.
There is also the question of paying for a lease extension. "The cost of extending a lease can be considerable and time-consuming," Kennedy says. "Two of my clients have extended the leases on their properties in recent months: the first cost £45,000, the second £38,000. In addition are legal costs, which can run to £2,000 to £3,000. Amy needs to consider how she will raise the additional money if she decides to extend the lease."
Pension and savings
Amy says she is living for the present rather than planning her finances. "In the long term this will cost her greatly," says Forbes. "She should be contributing to a pension scheme, especially if her employer offers matched contributions.
"Also, she should think about the short term and use her £5,100 cash Isa allowance and start investing for the medium term into an equities Isa. Her contributions to her pension and Isa don’t have to be huge at this point as she is focused on her property, but starting the habit of looking more long term will help to shape her finances much more efficiently."
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