Anna Sandall, 27, a trainee clinical psychologist from London, is hoping to find a home of her own in the capital sometime this year. She has carefully helped to save £10,000 for a deposit and has few debts, but with London house prices still out of reach for many despite last year's falls, Anna needs all the help she can get.
"I'm looking for a one-bedroom flat in the Battersea area of south-west London," she says. "I've been looking at prices for over a year with my partner, Simon, but now I'm worried that we will need to get in there before the area becomes too desirable or house prices begin to rise again. Plus, I'll be trying to balance house-hunting with the final year of my doctorate."
The good news is that Anna's financial situation is stable for a Londoner in her twenties. She has a good income, earning up to £35,000 a year, puts £200 into a final salary pension scheme every month and has limited living costs because she shares her home and all the bills. There's also the possibility that one of the Government's home-loan schemes will help her with the rest of the money she'll need.
Before committing to a home loan, Anna must be confident that the household income and expenses are not going to change. Anna will also need to build up emergency savings and comprehensive insurance in case of disaster.
Meanwhile, her instincts on the housing market are spot on, our panel of independent financial advisers (IFAs) suggests. "In real terms, UK house prices are back to the long-run average, wiping out all the overvaluation of the previous six years," says Joseph Clark of IFA firm No Monkey Business. "Few people have any idea what the trend of real house prices is, relative to general inflation, but it is reasonable to suggest that UK land and homes are generally close to fair or normal value at the moment."
Mortgages and savings
Anna could be eligible for one of the Government's "HomeBuy", assisted-purchase schemes which offer loans to those with low household incomes. "HomeBuy Direct" will help households earning less than £60,000 to buy a property on certain developer sites through an equity loan of up to 30 per cent of the property's value. There's also the "New Build HomeBuy", which helps people to buy a share of a newly built property and pay rent on the remainder. More information is available at www.direct.gov.uk.
But even if she can secure additional funding, Anna will still need a considerable deposit to get a mortgage for the rest of the money in this lending climate. She already has savings locked away in cash ISAs with Halifax and Northern Rock and some money in a range of shares – all of which are destined for the deposit on the couple's new home, but it may not be enough.
"In the current environment, Anna's short-term goal should be to build up the greatest possible deposit to put down on a property," says Ian Roberts of ARW Wealth Managers. "She will almost certainly need 10 per cent but more than this will give wider access to more competitive mortgage deals. There is already an element of savings in place and it would benefit the couple to establish a maximum purchase price that Anna and her partner would be prepared to go to. Then they can work out what the deposit shortfall currently stands at. They shouldn't forget the additional expenses that will be incurred at purchase, including legal costs and stamp duty."
"Anna should use up her full cash ISA allowances for the year as savings into a cash ISA do not attract any tax on the interest," adds Mr Clark. "And the maximum cash saving is going up from £3,600 to £5,100 in April 2010. Both cash ISAs and instant access accounts have rates ranging from 2 to 3 per cent, with instant access to your funds and no penalties for withdrawals."
But Tom McPhail of Hargreaves Lansdown is also concerned that Anna's existing investments could be too risky. "If Anna is aiming to buy her house within the next year or two, then she should perhaps look again at where her savings are invested," he says. "Any money invested in the stock market is at risk of significant losses. Although this may not be on the scale of the 50 per cent losses we saw about a year ago, if Anna is uncomfortable with the risk that any of this money could go backwards, then she should move it to a fixed-term deposit account. Rates for 90-day notice accounts are currently about 3 to 3.25 per cent, for example."
Wills and insurance
"Once Anna has purchased her home it would be prudent to consider life and critical illness cover and income protection," warns Mr Clark. "It's far from satisfying handing over money to an insurance company each month, but it may be the only way to avoid financial hardship if serious ill-health or death occurs.
"On a similar note, it may be difficult to discuss but Anna may also want to make legal arrangements to safeguard the proportion of the home that she is buying – perhaps buying the house as tenants in common, rather than jointly," he adds. "At the time of a home purchase your solicitor will be able to provide you with appropriate guidance."
Pensions and investments
It may seem a long way off, but one of the greatest financial perks of Anna's job is that she is a member of the generous NHS final salary pension scheme. This means that she could receive a pension worth about half of her final salary plus a lump sum. And if she wants to invest a little more for her retirement, Anna could even buy into the additional pension option that the NHS scheme offers.
Such a comprehensive retirement funding scheme means that once Anna has bought her house and created sufficient short-term savings to protect her situation, in the longer term her money can be invested elsewhere.
"Anna could look at using an equity ISA," suggests Mr McPhail. "She should consider using a small number of unit trusts to spread her investment risk across a range of holdings. This is an effective way to build up capital and to get long-term returns that exceed inflation. Depending on how much investment risk she wants to take, Anna could look at Absolute Return funds if she wants to play it relatively safe, UK Equity Income funds if you want to take a bit more risk or International or Emerging market funds if you really want to aim high."
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