Wealth Check: 'Is now a good time to get on the property ladder?'
Simon Meredith, 28, lives in a rented flat in south London with his girlfriend. He works full-time as a computer programmer but also earns a significant amount of his income from his work as a musician.
Simon has aspirations to run his own IT business in the future but right now is saving money to buy a house. He wants some advice on what the best options for mortgages are, as well how much he should be saving, both for the short and long-term.
"I'd like particular advice on buying a property; when a good time would be, whether interest rates are going to increase significantly, whether to go for a fixed-rate or tracker mortgage, what the minimum sensible deposit would be, and so on," Simon says. "We're currently aiming to have a 15 per cent deposit to put down on a property worth about £200,000. Would it be better to rent for longer and get a bigger deposit?"
Savings: £2,000 in deposit accounts and £4,000 in an ISA
Monthly outgoings: £2,600
Debt: £10,000 student debt
Offering their advice this week are Danny Cox from Hargreaves Lansdown, Duncan Carter from Clearwater Financial Planning and Ian Hudson from Hudson Green and Associates.
Cox begins by addressing Simon's concerns about rising interest rates and whether he should play it safe with a fixed-rate mortgage.
"I favour fixed rates for first-time buyers simply because they protect them from additional cost at a time when money can be at its tightest. Fixed-rate deals tend to be more expensive than other discounted or variable rates. However, knowing that mortgage costs will not rise is a great comfort."
Carter also favours fixed-rate mortgages, adding: "Although this can't be guaranteed I would expect interest rates to rise over the next 18 to 24 months and the conventional way of managing interest rate risk is to either fix or have a mortgage with a cap on the variable rate."
Carter thinks Simon is being sensible to save for a deposit as he is unlikely to find a mortgage lender given his current financial profile. But Cox warns that Simon is going to need more than just his deposit money if he wants to buy a house, as he's need cash to cover legal fees, removal costs and much more.
Cox says: "Simon and his girlfriend should continue to use a cash ISA to save in, since this is one of the most tax-efficient ways to save. There is no tax on the interest and they can each save £3,600 this tax year and £5,100 from April."
"Simon's combined income is around the level at which higher rate tax is paid, £43,875 making an ISA even more important, since taxable savings would suffer as much as 40 per cent tax. Simon is right to think that he should move the money from his current account into a cash ISA to get a better tax-free return."
As well as saving for a mortgage, Hudson is keen to emphasise the importance of saving for the unexpected. "You are the only reason you receive income, therefore it is pretty important to consider insuring yourself against your inability to work through long-term illness or accident. Could Simon continue working and earning a good wage if he were not able to perform his music or his work?
Simon also wants to take early retirement and currently pays into a final salary pension scheme with his employer. He hasn't been paying into it for very long but Cox certainly supports the scheme.
"This is a great way to build retirement savings but if Simon is to achieve his wish of early retirement, he is likely to have to save more than he is at the moment. The final salary scheme is likely to have its best value at the normal retirement date, 65. If early retirement were allowed (and that isn't always possible) Simon's pension will be reduced, typically 3 per cent per year. In other words retiring at 60 could cost 15 per cent of Simon's pension.
"For these reasons, Simon may need to consider other pension savings, perhaps a private pension. The advantage with a private pension is that benefits can be taken from age 55. For every £100 Simon saves, the Government adds £25 making it a very tax efficient way to save."
Duncan Carter summarises Simon as someone looking to lay foundations for longer term financial stability.
"Having capital available will create more opportunities to purchase property and possibly start his own IT consultancy in the medium to longer term. I would focus on the next two to three years as being the financial cornerstone and allow other plans to develop once this solid base has been established."
Ian Hudson adds: "Always review your financial goals, aspirations and plans regularly. This allows you to check your progress and to make adjustments as necessary. Financial plans are much like any other plans – if you ignore them and pay them only lip-service, they are unlikely to turn out as you expect."
For a free financial check-up, write to Wealth Check, The Independent, 2 Derry Street, London W8 5HF; or email firstname.lastname@example.org
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