Wealth Check: Recession-resistant and set on buying a home
His career prospects are good but he has to start again after spending time abroad. A teacher seeks guidance on saving for a deposit. By Harriet Meyer
Sunday 15 March 2009
Three years ago John-Mark Evans, 37, took some time out of his career to study yoga in India. "Now I'd like to put down some roots," says the chemistry teacher, who arrived back on home soil last month and plans to settle in Brighton. "I'd want to get on to the first rung of the property ladder," he adds. "But I can't see myself attempting to buy in the next year, as I don't reckon the bottom of the market has been reached."
Currently, he pays £550 a month to rent a room in a three-bed flat in central Brighton, and is taking his time exploring the area. "As I only moved to the coast this month, I need to find my feet before buying a home."
He is earning £25,000 as a secondary school supply teacher, but hopes to find permanent employment soon. "I don't know how easy it will be to get a mortgage as a supply teacher," he says. "But my profession is secure at present, so I feel I'm in a pretty good position." To boost his income, he hopes to teach Ashtanga yoga classes.
Fortunately, he has a solid base from which to start building a deposit. John-Mark has £3,200 in a cash individual savings account (ISA) with National Savings & Investments, paying 1.8 per cent, and £3,000 in an ICICI bank HiSave account paying 2.45 per cent. "As I've been out of the country over the past few years, I haven't been contributing to these savings accounts, but I plan to start as soon as possible."
To fund his travels, John-Mark used compensation received after a motorbike accident. "I got nine months' loss of earnings, which was a nice sum," he says. As a result, he managed to avoid falling into debt during his time abroad, paying off the balance each month on his Lloyds TSB credit card, which he used to rack up free air miles.
With regard to retirement, he has made four years' worth of contributions to the Teachers' Pension Scheme, paying in 7 per cent of salary. He has no protection policies in place.
With a career that remains stable during a recession and a base from which to build savings as the housing market plummets, John-Mark is in a better position than many, agree our panel of independent financial advisers (IFAs). "As a chemistry teacher, he will be in demand and should find a full-time post. From there he simply needs to get into the habit of regular saving," says Mark Wapshott at IFA St Edmundsbury Financial Services.
With prices plummeting, John-Mark is wise to let them fall further before buying a home, agree the advisers. But he has chosen an expensive city.
As a guide he will need a deposit of 10 to 15 per cent to gain access to a decent choice of mortgage deals, says Richard Morea from London & Country. However, even if he can only show a year's worth of supply teaching as income, this should be sufficient to appeal to lenders for standard deals, Mr Morea adds, as teaching is considered a secure occupation.
John-Mark's £6,200 in savings, though, is likely to be "swallowed up in fees and stamp duty", says Dennis Hall at Yellowtail Financial Planning. As a solution, he could opt for the Government's HomeBuy initiative, aimed at key workers such as teachers. Under this scheme, he could buy a share in a property – whatever he is able to afford – rather than all of it.
MyChoice HomeBuy is one of the most popular schemes. John-Mark could take out a low-interest equity loan of 15 to 50 per cent of the purchase price through his local housing association, with interest charged at 1.75 per cent. "And he could take a mortgage for the remaining balance with a willing lender," says Mr Morea.
He could increase his share in the property by 10 per cent at a time by gradually buying more chunks.
John-Mark should squirrel away as much cash as possible each month towards the property purchase. Yet with savings-account providers paying a pittance in interest, he will have to be patient to build a sufficient sum, says Gordon Bowden of Quainton Hills Financial Planning.
He could benefit from a more attractive rate on his individual savings account by transferring to Marks & Spencer's cash ISA, paying 3.1 per cent, and fixing this for a year, adds Mr Bowden. And while Nationwide's e-Savings Plus pays 2.5 per cent, Alliance & Leicester pays 3 per cent, including an introductory bonus, for the first year.
John-Mark should check to see if he's eligible for a tax rebate, say the advisers. An individual's annual allowance (currently £6,035) – the amount they earn before paying tax – under PAYE is divided into 12 months to cover the tax year. Depending on when he went travelling, he may find he is able to reclaim some of this sum if it remains unused. He should complete form R40 (available from www.hmrc.gov.uk), with a letter asking if he is eligible for a refund, and send it to his tax office.
To make a property purchase tax-efficient, he could see if his finances will stretch to a flat with a spare bedroom, allowing him the option of renting this out for extra income. The Rent a Room scheme allows him to rent out a room and benefit from up to £4,250 a year in rental income tax free, says Mr Bowden.
John-Mark is fortunate to belong to one of the few remaining final-salary pension schemes. But he only has four years of contributions behind him and there are several ways in which he could top up his pension in future.
The teachers' scheme offers the chance to buy added years through additional voluntary contributions (AVCs), which are guaranteed to provide extra income in retirement. "This can be very valuable and does not involve investment risk," says Mr Bowden.
As he is single with no dependants, John-Mark has no need for life cover. "And," adds Mr Bowden, "he has the luxury of a three-times salary death-in-service benefit as a member of the Teachers' Pension Scheme."
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