Wealth Check: 'I'm living with my Mum, and I want to move out'
Saturday 18 November 2006
Mary Barber has worked as a sales manager for a soft drinks company for a year. She currently shares a two-bedroom flat with her mum, but would like to move out, ideally by February next year. She isn't sure, however, whether her finances are in good enough shape to justify taking on a mortgage.
Mary's current salary is £28,000 and she gets a bonus worth up to a further 20 per cent of pay each year. She does have a small amount of savings and she has also joined her company's pension scheme. However, Mary does have some debts, including a student loan of £1,248 and a loan from Barclays with more than £3,600 still to repay.
We asked three financial advisers for their advice: Drew Wotherspoon, of John Charcol; Ben Yearsley, of Hargreaves Lansdown; and Darren Littler, of Savills Private Finance.
Mary Barber, 25, sales manager, London
Salary: £28,000, plus a yearly bonus.
Savings: A Barclays savings account that currently holds £4,000 and an ISA with Abbey, worth about £2,200.
Debts: Student loan with £1,248 to pay and £3,632 on a Barclays bank loan.
Pension: Mary is a member of her work money purchase pension scheme.
Monthly spending: £830 on living expenses and bills.
Mary believes she would be able to get a mortgage of around £150,000 and this is about right looking at her salary and bonus, the advisers say. However, before purchasing a property Mary needs to think about both the initial costs and the ongoing payments.
Littler says that Mary needs to remember that the upfront costs of purchasing a property include stamp duty - on a property of £150,000, this would be 1 per cent or £1,500. Then there will be the lender's valuation fee, the survey and legal costs - these could easily add up to a further £1,500.
These costs will obviously affect the size of the deposit Mary can put down, though some lenders will assist with these costs. Northern Rock contributes £500 towards legal bills on completion, for example.
Mary has made a decent start with her savings but she should increase them to at least £7,500 in the next few months. That would be a deposit of 5 per cent on a property with a purchase price of £150,000, giving her access to cheaper mortgage deals. The difference in price between a 95 per cent and 100 per cent mortgage is about 0.35 percentage points, which equates to a saving of about £25 a month, says Wotherspoon.
Wotherspoon also thinks that Mary should consider spending slightly less on a property and instead use some of her savings to pay off her bank loan. However, this depends on what's available in her local housing market - at the very least, she must make sure the interest rate on the loan is competitive.
Everyone should have at least three to six months' salary saved for a rainy day and the ideal place is a mini cash ISA - a tax-free and easily accessible account. Mary's Abbey ISA is therefore a good account.
Mary's debts are relatively small, according to Yearsley, and should be paid off in a couple of years. He doesn't think she should be too concerned about them, though he also thinks that she may be able to find a cheaper interest rate.
Once Mary has bought her property she should start looking at her long-term savings - a stocks and shares ISA would be a good place to start. Yearsley suggests that Mary should invest via a fund supermarket in order to get access to a range of different fund management companies under the same roof.
Mary has made a good start with her pension, and she would be happy to increase her monthly contributions. There's no reason why she shouldn't if she can afford to, but she is saving more than most people her age, so there's no rush.
However, Yearsley suggests that Mary should check that her pension funds are performing well. He also points out that, with so long to go to retirement, she can afford a higher degree of risk. Mary should realise, though, that her aim of retiring by 50 may not be possible as the pension rules are changing.
Another key issue is income protection, and Mary needs to check with her employer to see if they offer any sort of cover. Permanent health insurance or critical illness cover would be worthwhile for someone with no dependents. This type of insurance can be expensive, but will cover you if you can't work due to ill health.
For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail email@example.com
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