Daniel Goodall, 28, is eager to buy his first home, but wonders whether property prices have further to fall before he takes the plunge.
He works as a natural search analyst for a digital marketing company in London, earning around £30,000 a year. "I'd like to buy my first home with my girlfriend but wonder if the economic problems will see flat prices fall further over the next year," he says. "So maybe we should sit tight."
In short-term savings, he has managed to amass about £20,000 in an HSBC Online Bonus Saver Account paying 0.75 per cent. "I scrimp to save about £300 per month, and sometimes also receive a quarterly bonus of around £400 after tax so I'm able to set aside slightly more," says Daniel. "But I'm not sure I've got the money in the right account – I was advised to move out of an ISA into an ordinary account as I was told ISAs aren't competitive at present."
His girlfriend doesn't have any savings but she's in full-time employment and earns £22,000 a year. "I'm aiming to have saved a further £10,000 in total by the end of 2010, to replace some of the savings I'm using as a deposit, so we'll have something to fall back on in case we need it," he says. "We are hoping to consider buying in the next six months."
Currently, he is paying about £600 a month in rent for a one-bedroom flat shared with his girlfriend. "We've recently started viewing flats in the Sussex area – so outside London – around the £160,000 price mark," he says. "However, to reach our goal, the mortgage adviser has suggested that we try to increase the deposit by at least another £5,000 to £10,000."
Fortunately, Daniel has managed to avoid taking on any extra debt aside from a student loan. He still has £2,000 of this left to pay, but with no credit card or personal loan debt this "doesn't worry" him.
He has a company pension into which he contributes 5 per cent of his salary – this is matched by his employer. "I've been contributing to my pension for the past three years, but I'm not too worried about retirement; I would like to increase my contribution to around 8 per cent once I've found a flat to buy, though," he says.
Whether Daniel decides to wait before grabbing the property ladder depends on his opinion on where the market will go – the experts are divided. But whatever decision he makes, it is wise to continue slotting away spare cash towards future goals.
Along with his girlfriend, he should work on putting himself in the best possible position to appeal to lenders. But with no debt, a pot of cash savings being built up and stable jobs, they have a good starting point, agree our panel of independent financial advisers (IFAs).
The advisers stress that Daniel should have stuck with the ISA he originally had. "The advice he was given wasn't good – he was told to move out of a tax-free savings environment when he could have simply switched to an ISA with a higher rate," says Danny Cox from IFA Hargreaves Lansdown.
ISAs have an immediate 20 per cent advantage for savers over normal deposit accounts. "For every £1 of interest, Daniel received £1 from the ISA compared to 80p from a taxable account. To match an ISA account paying 3 per cent, the taxable account would have to pay at least 3.75 per cent, for example," he says.
Daniel should use "best buy" tables on sites such as moneyfacts.co.uk to get the best rate on his ISA and normal deposit accounts, says Duncan Carter from IFA Clearwater Financial Planning. Unfortunately, rates remain low in the current climate – Barclays is paying just 2.58 per cent on its instant-access cash ISA.
Between them, Daniel and his girlfriend can shelter from the taxman £7,200 (£3,600 each) this tax year and a further £10,200 (£5,100 each) from April in cash ISAs – a total of £17,400.
Once the ISA allowance is used, the regular amounts Daniel plans to save should be paid into a cash deposit or regular savings account.
"And, given the relative proximity of purchasing a flat, only instant access or short-term notice accounts would be suitable," says Mr Carter.
The potential benefits of buying in the near future for Daniel may be "that the housing market rebounds and he makes a profit", says Ian Hudson from IFA Hudson Green.
"However, interest rates only really have one way to go from here – upwards," he adds. "This could see house prices fall further, leaving the couple with less equity that they began with and facing higher mortgage costs as interest rates rise."
The couple must make their own decision. "Yet, if property prices rise and they have not jumped on to the ladder, then, in the short-term, I can't see that this is a bad thing – increasing savings will offset part of the higher property price," says Mr Hudson.
Turning to the potential house purchase, the mortgage broker has suggested they need to save a further £5,000-£10,000 on top of the £20,000 already saved. A 20 per cent deposit would give them access to better mortgage deals, agree the advisers.
Given the price of the flats they want to consider, this would require around £32,000. However, they need to remember that in addition to the deposit, they will have to pay for the associated costs of buying, including the survey, legal searches and moving costs, plus buying furniture or paying for any home improvements needed.
"Daniel should probably allow around £1,500 to cover the main costs associated with buying a property," says Mr Cox. "However, if a more in-depth survey or investigation is required, further funds would need to be available – and this will leave them with no spare cash."
Daniel has joined his company's pension scheme, which is "good news", say the advisers, as this will provide a decent foundation for his retirement plans.
However, Mr Carter says that while a 5 per cent matched contribution is "reasonable", it is unlikely to provide the level of benefits needed in retirement.
"He should aim to save between 15 and 20 per cent of earnings towards retirement funding at some stage, and carry out regular checks to ensure plans remain on track."
Do you need a financial makeover?
Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF firstname.lastname@example.orgReuse content