Wealth Check: No income, no job, but I want my own home
Student Alice Lovegrove is a savvy saver, but will she be able to convert her cash pile into a property-owning dream?
Sunday 12 July 2009
Alice Lovegrove, 22, from Tonbridge, Kent, has just graduated from Newcastle University. But instead of looking for a job, she's starting another degree in Edinburgh and plans to buy a one-bedroom property while she's there, despite having no income of her own.
"I just feel like renting would be throwing money away," she says. "I'm not too worried about the Scottish way of buying property because it seems to be changing to become more like the English system."
Alice will need to rely on her parents for financial support through her second degree. But she has been far savvier about her spending as a student than most undergraduates, and has managed to squirrel away around £40,000 in savings during her life. This includes some money given to her as a child. With this sizeable deposit, Alice will require a mortgage of only about 65 per cent of the value of the property she wants.
"Alice has done brilliantly by saving while in university, a time when most people go into debt," says Danny Cox of Hargreaves Lansdown. "With a deposit of about 35 per cent of the value of the property she would like to buy, Alice is also able to choose some of the best mortgage deals available." But she hasn't picked an easy task, with everything from the challenges of a "guarantor-backed mortgage" to the Scottish house market system set to make her choices more complex.
Lenders will expect the borrower to have a steady income, and may expect the job to have a defined career progression, such as an accountant or lawyer. While Alice is about to embark on a potentially lucrative career, an earning stream is some way away so her options may be limited, even with the significant deposit available, and the financial support of her parents. Since Alice lives on money that her parents give her and does not have earnings herself, the mortgage lender will require a guarantor who will agree to pay the mortgage if she can't cover it herself at any time.
They may be required to guarantee just part of the mortgage or, in most cases, underwrite the whole amount, and are assessed on income, assets and other financial commitments such as their own mortgage. But the guarantor has no legal ownership rights to the property, which can leave them in a financially vulnerable situation. This is not a decision for parents to enter into lightly, our panel of independent financial advisers warns.
Alice has her eye on a property in Edinburgh, where property prices are extremely volatile. In March, according to one measure, prices in Edinburgh fell by 7.6 per cent in just a month, but in April they were up by 5 per cent month on month. Generally, though, over a longer time, prices have been heading downwards as in the rest of the UK. Alice may find this situation will help her to find a bargain, but she should set up her mortgage before making an offer, especially because of the way the Scottish property market works.
"Before she starts flat-hunting too hard, Alice should check how much she can actually borrow, and decide what kind of mortgage is most appropriate," warns Chris Wicks of IFA firm N-Trust Limited.
If Alice plans to sell the property after she has graduated, she may decide to go for an interest-only mortgage, keeping the payments as low as possible, but not actually paying back any of the money she borrowed.
"Given that the next movement for interest rates is probably up, Alice may want to fix the rate, ideally for the duration of her course," Mr Wicks adds. "This would allow you to have some peace of mind that while you remain a student your expenditure will not suddenly shoot up."
Fixed rates for two or three years currently cost about 3.34 per cent, but those for five years start at about 4.45 per cent. Current standard variable rates range from 2.99 per cent to nearly 5 per cent per annum, but it is difficult to predict when rates could go up. "Given that no one really knows what will happen to rates, a reasonable compromise may be to go for a three-year fix on the basis that rates are unlikely to go up in the very near future," Mr Wicks suggests.
Alice should look at the arrangement fees and other related charges as well as the basic cost of the loan, suggests Darius McDermott of Chelsea Financial Services.
If she's sure she wants to be a homeowner, there are fundamental differences between the way that Scotland and the rest of Britain deal with property transactions, which could land Alice in hot water if she isn't prepared.
"In the Scottish system, the contract for one party to sell and the other to buy can become legally binding very early in the process, in contrast to the rest of the UK," explains Mr Cox. "In fact, under the Scottish process, once an offer is accepted and the price agreed, the contract is binding. Offers in Scotland are generally made in writing and through a solicitor, whereas in the rest of the UK they are verbal and usually with considerable negotiation to and fro via an estate agent.
"In the rest of the UK, offers are also made 'subject to contract' and contracts have to be exchanged before the sale becomes binding.
"Hence, the contract does not become binding until much later in the process, sometimes not until the day of the move. If you subsequently withdraw or alter an offer in the rest of the UK, providing that contracts haven't been exchanged, there is no legal commitment to proceed, but you don't have that luxury north of the border."
The advisers urge Alice to be absolutely sure of both her mortgage agreement and that she has chosen the right home before taking the next step.
Alice plans to use her substantial savings to fund a deposit on her property. However, generally, IFAs recommend homeowners keep a minimum of a couple of thousand pounds on deposit. The idea is to have a cash float in case of emergencies, such as a broken boiler or roof repair. The money should be held in a cash individual savings account to shield any interest from tax. At present, according to price comparison website Moneysupermarket.com, Abbey is paying 3 per cent on its Direct ISA.
For now, Alice knows that she can rely on her parents to foot the bill for her mortgage. But when she has graduated and begins earning an income, she should think carefully about how she will be able to meet her monthly bills. When she starts work, Alice should also consider taking out an income protection policy, which will pay out a proportion of her income if she loses her job, or if an accident or illness means she is unable to work.
Unlike other short-term policies, this kind of policy will pay out until retirement if necessary, rather than for a year or two. And unlike policies that are sold against a particular loan, income protection will give Alice a monthly income to help cover other costs, such as food and utility bills.
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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