Wealth Check: 'Should I buy now or try to save up a deposit?'
Saturday 30 April 2005
Kate Towner lives and works in Manchester. She currently rents a flat but would like to buy her first house.
Kate Towner lives and works in Manchester. She currently rents a flat but would like to buy her first house. Unfortunately, she doesn't have much in the way of savings because she has been having treatment for cancer for the last two years. Thankfully she is now cured, but at the time of diagnosis she was working abroad and had to move home in a hurry, incurring financial penalties.
Kate has outstanding loans of around £6,000, but now has a secure job at Manchester University and mortgage lenders, such as Scottish Widows, have offered to lend her up to 110 per cent of property value. This would mean that Kate could buy a house sooner than she had expected, and would allow her to pay off the loan while retaining some financial flexibility.
Kate believes that Manchester house prices are likely to keep rising, but would like advice on what a sensible plan of action would be. Should she save up and buy a house in two to three years' time - she manages to put aside £200 each month which is sitting in her current account at the moment - or go ahead with the 110 per cent mortgage?
Kate Towner, 30, chartered accountant
Salary: £31,500 a year
Pension: Final salary scheme with 14 per cent employer and 6 per cent personal contributions
Debt: £6,000 loan, some of which is from her parents
Property: Currently renting, keen to purchase a house in the Manchester area costing in the region of £110-120,000. Has been offered a 110 per cent mortgage by Scottish Widows, and others, to compensate for her lack of a suitable deposit
Savings: Around £3,000 in current account
Monthly outgoings: rent £450, loan repayments £106, savings £200
We outlined Kate's case to Robert Lockie from Bloomsbury Financial Planning Limited, David Carmichael at Savills Private Finance and Drew Wotherspoon at Charcol.
David Carmichael says that if Kate's local knowledge and instincts lead her to believe that Manchester house prices will continue to rise, she should buy now rather than risk paying more by waiting until later.
She is in a strong position as she has a good income and a manageable amount of unsecured debt. Many lenders offer attractive packages to first-time buyers and professionals, but she must ensure that she doesn't pay a higher lending charge (HLC), a fee that penalises people without sizeable deposits.
Scottish Widows, C&G and Northern Rock don't have HLCs. Widows, for example, has a professional mortgage with a fixed annual rate of 5.69 per cent until 31 May 2008 - the £295 booking fee can be added to the loan and there is £150 cashback towards legal fees.
If Kate borrows 3.5 times her salary (£110,000) on a repayment basis and puts down no deposit, the loan will cost her £688 a month. This is just £38 a month more than she currently spends on rent and savings, so her cash flow will remain broadly similar.
Drew Wotherspoon notes other providers who will lend 100 per cent or more include Bank of Ireland and Coventry BS. Whether she should buy now or wait depends on what she wants the property for. If she wants to buy a home and is not overly concerned about the property price rising, then she should get on the ladder as early as possible. Charcol does not believe there will be a house price crash; indeed it anticipates prices rising by around 4 per cent in 2005.
Robert Lockie says that while it is tempting to buy as early as possible, it is important to consider the upfront costs involved. These will include a homebuyer's survey, solicitors' fees and buildings insurance (which must be arranged from the date of completion). Kate may want to build up some more savings to spend on furnishings and some contingency for the ongoing costs of owning a property.
At least a proportion of Kate's debt is with her parents. Depending on the cost of the loan from them, Lockie suggests it may be best for Kate to maintain this and borrow less from the mortgage lender when she buys.
Wotherspoon says that Kate needs to ensure that she is getting the best rate available for her loan. If the entire outstanding loan of £6,000 is with her parents, then hopefully she is being charged minimal interest. But if some is with a bank then it may be worth moving it - good rates currently include Co-operative Bank's offer of 5.9 per cent, or 6.2 per cent at Cahoot. But Kate needs to check she won't be charged penalties by her existing provider if she changes her lender.
Carmichael says that, with no stamp duty to pay if Kate spends less than £120,000 on a property, her initial outlay will be around £1,000, so she could use the remaining £2,000 to reduce the loan from her parents. If she prefers to pay off the loan and consolidate it into her borrowings, her mortgage will increase by around £35 a month. But, she should note that this will mean paying the debt back over 25 years.
Lockie suggests Kate should wait to buy a property. If she can save £200 a month, an internet-based savings account would offer preferable rates. She should be able to save £4,800 over two years and this would provide a good fund for unplanned expenses and upfront costs.
Wotherspoon says that Kate is lucky to be in a final-salary pension scheme. These are few and far between these days: contributions from her and her employer total 20 per cent, which is very good and she should continue with this.
However, he recommends moving her savings away from the current account. Many savings products will offer the same degree of flexibility but with much better rates. She should consider an instant access individual savings account that offers tax-free interest. The best cash ISAs currently pay around 5 per cent interest.
- 2 Mystery man who gave mum heart-warming note on train 'wanted to put a smile on her face'
- 5 Amal Clooney gives excellent answer to fashion question at European Court of Human Rights
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
Louise Mensch says 'F**K YOU' in explosive tweets about David Cameron, Saudi Embassy and the Queen over King Abdullah tributes
iJobs Money & Business
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...
Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...
£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village