Luke Grahame, 28, is a musician from Cardiff. He plays the guitar in Shaped By Fate, a rock band started eight years ago.
He plans to buy a property soon and wants to make sure his finances are in good shape. While he would like music to be his main source of income, he currently does some other part-time work to make ends meet. "I work in films and do some modelling to make sure I can pay the bills," he says. "My salary is inconsistent, but with the band and other work I made about £20,000 last year."
To ensure he will always have earning potential, Luke is starting an eight-week course in Bristol next year to qualify as a personal trainer. "This gives me the option of working as a trainer on a self-employed basis in the future with the capacity to earn a fair bit – a good safety net for me," he says.
Luke's financial focus is getting a foot on the property ladder with his girlfriend, with his savings being used for the deposit. He has been slotting away spare cash whenever possible, and has amassed £20,000 in savings in an easy-access individual savings account (ISA) with Lloyds paying 2.8 per cent.
"My girlfriend earns more than me and so the mortgage will be based on her salary," he adds. At present, he pays £200 a month for a room in a two-bed flat in Cardiff, but he would like to buy a two-bed flat around the area.
After some research, they estimate that a property of this size will cost between £100,000 and £115,000. "But I'm worried about the property market and if it suddenly starts to rise again before we buy. Nobody seems to know what's going on, so I'm keen to hear what the advisers have to say on this."
In particular, he is seeking some guidance on what they should be looking for in a property to benefit from long-term growth. "We want to make a wise decision and make sure the property will be easy to sell," he says.
While Luke steers clear of credit card debt, he still has £13,000 in student loans left to repay. He has yet to consider retirement planning, with no pension provision in place.
Stepping on to the property ladder for the first time can be nerve racking, but Luke is in a good financial position with earnings, savings and debt that are under control. However, he would be prudent to consider some important issues before taking the plunge – including predictions for the property market.
The property market has recovered somewhat from its low of 2007, says Danny Cox from IFA Hargreaves Lansdown. "Even so, all the indicators suggest prices will be falling rather than rising over the next 12 months.
"Public-sector cuts, wage freezes, growing unemployment, rising inflation and an increase in capital gains tax – affecting buy-to-let investors – and the picture for the economy and property market looks bleak."
So Luke should be more concerned about prices tumbling than any rises in the near future.
"If local house prices fall after he buys, he may find himself in negative equity and unable to move house," warns Robert Forbes from IFA Plutus Wealth Management. "That may be fine in the short term, but in the medium term, if he needs a larger property, splits up with his partner, or needs to move away, the options will be limited. The financial impact of that would be onerous, and needs to be considered."
Turning to what type of property and where they should buy, Mr Cox says: "The phrase 'location, location, location' has never been more important – this is the prime factor when choosing the right property for a long-term investment." The couple should also bear in mind that cheap property tends to be a bargain for a reason. "Either the location is poor, or there is an issue which is about to make the location poor, such as a new road – or the property is in a state of disrepair."
Crucially, stress the advisers, the best properties don't stay on the market for long – even in this climate. "And a two-bed flat is far more saleable than a one-bed because it would allow them to accommodate a lodger or perhaps start a family," says Mr Cox.
Deposits of at least 25 per cent of the property's purchase price are necessary to secure the best mortgage deals. "Credit remains expensive and hard to secure: banks and building societies continue to have strict criteria," says Mr Cox.
The advisers suggest opting for a fixed-rate mortgage for the security of steady monthly repayments. Robin Keyte, from IFA Towers of Taunton, says: "We expect the Bank of England base rate to start rising next year, possibly to 1.5 per cent, and then again the year after, maybe to 3 per cent or more."
They should opt for a repayment mortgage to ensure they whittle down the capital debt, rather than an interest-only deal, he adds. It is also wise to own the property as "tenants-in-common" so that they each own a share and can specify how much of it each party owns. "This arrangement is useful if there is a disparity in the sums of money being invested by Luke and his girlfriend," says Mr Forbes.
They should also factor in extra purchasing costs including legal fees, searches, surveys, removal costs and new furniture, as well as any work that needs doing on the new property.
If possible, Luke should try to maintain about £5,000 in an emergency fund once the property is bought. "If this is unfeasible, over time he'll need to work on replenishing his savings," says Mr Keyte.
Luke could use his savings to clear his student loan rather than invest in property, says Mr Keyte. "He could consider clearing the loan and then saving hard when he qualifies as a personal trainer." He should watch the interest rate on this loan. It rises to 4.4 per cent in September in line with the retail price index (RPI) and it is unlikely his cash ISA will achieve this level of return.
Pension planning too near the time is risky. Luke is unlikely to achieve the income he would ideally like in later life, but he has time to consider this once he's bought a property. Remember, contributions made early make the most difference to a pension pot.
With the responsibility of a mortgage, Luke and his girlfriend should invest in a low-cost life assurance plan that pays off half the mortgage in the event of either of them dying.
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