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.
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