Wealth check: Is there an ethical way to buy a house?
Limited savings, a student loan and green considerations can make a young woman's property dreams difficult to realise, says Maryrose Fison
Sunday 04 July 2010
Like many people in their late twenties, Eloise Horsfield would like to move out of the rental sector and buy her own home. But with limited savings, tighter lending requirements and a desire to make her financial decisions ethical, she is uncertain how to approach her goal.
"I'm worried that if I wait too long the house prices will go up again and that I'll be really old before I'm able to pay it all off," she says.
In an ideal world, Eloise says she would like to purchase a two-bedroom flat in London but she is willing to consider buying further out or in Bristol, where she has friends and previously went to university. She has also contemplated renting out one room or buying with a friend.
Eloise earns an annual salary of £22,350 based on a 30-hour-working week which she opted for 12 months ago so as to study on a part-time media studies course. When she completes the course in six months, she will have the option of returning to her full-time salary of £29,803 and earning extra money through freelance French and Spanish translation work.
The high cost of living in London and repaying a hefty student loan has made it difficult for Eloise to accrue a substantial savings pot. She has approximately £1,000 in savings and is budgeting for about £200 in savings each month. Her outgoing costs include £540 in monthly rent for a room in a shared flat in Stoke Newington and £60 per month on student loan repayments. To date, she has paid off £3,475 of her loan but still has an outstanding balance of £16,293.
Helen Tandy, an independent financial adviser at the GAEIA Partnership, a firm specialising in environmental and ethical investments, says it will take Eloise some time to achieve her dream of buying in London if she wants to maintain her present lifestyle, but says more options could open up if she is prepared to leave the capital or save more each month.
"Having looked at the Bristol area, it seems she would be able to purchase a property there with good rail links into London to her requirements, for about £150,000 to £160,000. This would link in with her salary level and mortgage affordability," says Ms Tandy.
If Eloise continues saving £200 per month and is earning her full-time salary, Tandy calculates it would take her between six and seven years to save enough money to put down a 10 per cent mortgage deposit. However, she says lending companies will invariably take her student loan debt into account so she would be wise to pay this off as quickly as possible. She says Eloise could reduce the time frame for getting a mortgage if she increased her monthly savings and returned to a full-working week.
"It would be better from the view of arranging a mortgage and savings if Eloise were working on a full-time basis with a regular, more guaranteed income than freelance work. She would need to save £666 a month to save £16,000 over 24 months. Returning to full-time work or even putting away any extra income from freelance work would all help increase her savings."
Although Eloise doesn't expect to receive financial donations from her parents, Ms Tandy says she could consider asking them if they would be prepared to offer savings as a security.
"I have found one high street lender offering a 95 per cent mortgage if an extra 20 per cent of the purchase price was put aside in a special savings account with the same lender. This may offer Eloise some chance of purchasing a property sooner if she has a family member who is unable to give her the funds to help her with the purchase but may be willing to set aside money in an account in this way to provide a helping hand.
"If she wanted to raise a larger mortgage, a family member could act as a guarantor on a mortgage in her name, whereby their income or a proportion of it would be taken into consideration; however, she would still need at least a 10 per cent deposit."
Helen Tandy has also tracked down a number of mortgages which fit Eloise's criteria for finding a product which will enable her to act ethically with her money.
"Co-operative Bank and Ecology Building Society both offer mortgages to those borrowers who would prefer to deal with an ethical provider. Ecology Building Society lends on cases where it can see an environmental benefit in the project. This could be the type of building or renovation work being carried out. Norwich and Peterborough building society offers "green" mortgages that help to offset the carbon generated by the property by planting trees."
Adam Young, the managing director of Dragonfly Financial Planning, believes it will be difficult for Eloise to maintain her lifestyle and buy a property and feels Eloise needs to ask herself whether she really wants to buy at such a volatile economic time.
Eloise could spread the costs by buying with a friend or taking advantage of tax-efficient room-rental schemes. The Government's Rent-a-Room scheme allows homeowners to receive a certain amount of tax-free gross income from renting out furnished accommodation to a lodger.
"Purchasing a property jointly would help absorb some of this risk, but sharing a purchase has its own trials and tribulations," he said. "By contrast, acquiring the property in her own name would provide control and tax efficiency. She could rent a room where up to £4,250 could be earned without being subject to tax. The risk obviously comes from having no tenant."
Although Eloise's workplace does offer a pension, she has prioritised repaying her student loan over making contributions so far. But Bhupinder Anand, the managing director of Anand Associates, says she would be wise to take advantage of this option as it is a win-win situation. "Eloise is wasting an opportunity by not joining the company pension scheme. This is in effect 'free money' and, even if she has to make a contribution herself, it is something she must do."
While many begin saving in a pension in their thirties, the cumulative effect on retirement income in later life of delaying saving now can be sizeable.
"The cost of delaying starting a pension can be substantial. For example, saving just £200 per month (net of basic rate tax) starting now would deliver a fund of £375,000 at age 65 for Eloise. Deferring the start date by just five years has a huge impact, delivering a fund of £260,000 – almost a third less. To achieve the same higher fund, but starting in five years, Eloise would have to start investing £285 per month."
Do you need a financial makeover?
Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF firstname.lastname@example.org
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