Wealth Check: 'I'm trying to build up a deposit'
Saturday 18 March 2006
Penny Jackson is 26 and works as a humanities teacher in London. Currently renting, Penny hopes to get on the property ladder within the next five or six years. She is trying to save £150 a month to build a deposit. Her monthly outgoings make this difficult.
As well as help with her general budgeting, Penny would also like advice about saving for retirement. She has been paying £115 a month into the Teachers' Superannuation scheme.
We asked three independent financial advisers for their help: Anna Bowes of Chase de Vere, James Cotton of London & Country and Colin Jackson of Baronworth Investment Services.
Penny Jackson, 26, London
Personal: Works as a teacher in London. After tax, her monthly salary is £1,310.
Property: Penny currently rents, but would like to buy her own home within the next five or six years.
Savings: She is currently aiming to put around £150 by each month, but has budgeting constraints.
Pension: Contributing monthly to the Teachers' Superannuation scheme.
Monthly expenditure: Living expenses £600; regular savings £150; pension £115; student loan £60; general expenses £250.
Penny should seek the best interest rates available, so she must also take advantage of her mini cash individual savings account (ISA) allowance. She can transfer up to £3,000 from her current savings into a competitive account such as Alliance & Leicester's Direct ISA. This pays 5.25 per cent, although this includes a bonus only payable for the first 12 months. And after 5 April, when the new tax year begins, she can open another cash ISA.
The more pennies Penny can save, the better. A bigger deposit means a better choice of mortgage deals and lower rates, said Cotton. She should aim to save 10 per cent of the house price.
The amount she will be able to borrow will depend on how much she earns at the time. Penny could borrow up to four times her salary, so she could get a mortgage for around £92,000. Some lenders use affordability calculators which may offer more . Borrowing £100,000 at a rate of 5 per cent would cost around £585 a month, over 25 years.
Jackson is not optimistic. On her current income and expenditure, Penny will probably find it difficult to purchase a property in London within the next few years, he warns. It is unlikely that she will be able to save up enough for a deposit, legal fees and stamp duty. Her best option would be to buy with one or two other people, he suggests. If Penny goes down this route she must seek legal advice and make sure that a contract is drawn up.
When it comes to choosing the type of mortgage, there are two main options - fixed or variable. A variable rate will fluctuate as interest rates move up and down. A fixed rate usually costs more, but it means the rate and therefore the monthly payments remain fixed. A fixed rate provides security and is particularly suitable for those on a budget, so this may be the best option for Penny as a first-time buyer, Cotton said.
Aside from a deposit, there are other costs that Penny must save for. If she buys a property for more than £120,000, there will be stamp duty to pay, which is currently 1 per cent of the purchase price, assuming the property is worth less than £250,000 (this is based on current rules and could change in the future).
She will also have to pay for a valuation and cover the cost of legal fees. Penny may also come across higher lending charges (HLCs) which some lenders levy if the borrower's deposit is 10 per cent or less. These can cost thousands of pounds and should be avoided if at all possible. Fortunately, a number of lenders such as Nationwide, Cheltenham & Gloucester and Co-Op offer deals with no HLCs.
The fact that she is a teacher may provide Penny with a wider range of mortgage options. Scottish Widows, for example, will lend more to people in certain professions. The Teachers Building Society also has special deals.
She may also qualify for help under the Government's Key Worker scheme - her school should be able to give her more details, or she can go to www.keyworkerliving.co.uk.
Bowes says that for the time being Penny can concentrate on saving her house deposit in the knowledge that she is already contributing into a pension - the Teachers' Superannuation scheme - that offers good value.
For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail firstname.lastname@example.org
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