Wealth Check: The race to buy while prices are tumbling

An entrepreneur hopes to purchase a home of his own next year, but he has debts to pay off and savings to build from scratch, writes Harriet Meyer


The patient


James Mitchell, 28, hopes to "pick up a bargain" as the housing market continues to plummet. "I'm waiting for the right time to buy a property," he explains, "although this will probably be next year when prices reach their low point and when I've managed to build up some savings."

He already has experience of the property market, because three years ago he bought a two-bedroom house in London with his girlfriend. However, they split up and the home was sold in 2007, with the profit bring split between them.

"Fortunately, we sold before the market began to sink," James recalls. "But after charges for getting out of the mortgage early, we only made a few thousand each, and I used this for a holiday to Thailand."

Since then, he has set up his own public relations consultancy and estimates that his fist year's earnings will be around £30,000. As he only started the company last summer, he has yet to tackle his first tax return. "The business pays significant dividends, which form a large part of my salary, and my accountant has arranged things so I pay as little tax as possible."

After ploughing all his spare cash into the venture, James hasn't managed to set aside any savings towards getting back on the property ladder. While he has a Nationwide cash individual savings account (ISA), this is currently empty. "Now my income is starting to rise, I hope to change this," he says. "I want to start paying into the account again."

Yet James pays a hefty proportion of his salary to rent a room in a two-bedroom flat in Docklands, east London, which costs him £1,100 a month.

He also has some debt to deal with. He is £2,000 overdrawn on a Barclays current account at 17.9 per cent, and has £16,000 in student loans.

At present, he is not paying into a pension scheme and has no protection policies in place. "When I can, I would like to make a variety of investments for my future, including pensions, property and equities."



The cure

If James is able to secure a decent mortgage deal in a year's time, buying a property could form part of a sound financial plan, agree our panel of independent financial advisers (IFAs). However, before taking advantage of a faltering housing market, he has debt to deal with, savings to make, and a business to build during tough economic times.



Debt

While James intends to make savings, he should first focus on clearing his overdraft, stress the advisers. The rate on this is hefty and far greater than any returns he could achieve on a savings account. "Any surplus income should be directed towards wiping this out," says Dante Peters of Magnus Financial Management.

The rate of interest on student loans fell from 3.8 per cent to 3 per cent in December following the cut in the base rate by the Bank of England, making it a particularly cheap debt. Yet there is no longer a compelling case for putting cash into a savings account instead of clearing a student loan because the rates on savings accounts are so low at present.

That said, making overpayments is not a priority for James, given his goal of buying a property. He should continue paying this debt off gradually.



Property

As long as James kept up repayments and the mortgage debt was settled on his old home, along with any penalties for early repayment when the property was sold, this will have no bearing on any future purchase.

"However, he needs to be realistic about what sort of mortgage he will manage to get during the credit squeeze," stresses James Norton from IFA Evolve Financial Planning.

The combination of a decent deposit and a good earnings record over the next year would put him in a strong position, says Richard Morea from mortgage broker London & Country, adding that because James is self-employed, he may find the choice is limited. Many of the lenders that specialise in deals for borrowers who can't prove their income are withdrawing from the market.

"Yet with just one year's worth of accounts and a projection of future earnings from his accountant, he can access standard deals," says Mr Morea. "This way, he won't need a self-certification mortgage as he is providing evidence of his income."

With plans to buy around 18 months after becoming self-employed, this option should be a possibility for James. However, he should avoid buying a new-build flat as lenders are likely to restrict the amount he can borrow on these properties, adds Mr Morea.



Savings/investments

To gain access to a reasonable choice of mortgage deals at the moment, James would need to put down 15 per cent of the property price as a deposit. "This, though, won't give him the best deals – and the more he can put down, the better," says Mr Morea.

Setting aside a regular sum will establish a good savings discipline for James. For example, Barclays has a monthly savings account paying a competitive 6 per cent on a maximum contribution of £250. After basic-rate tax, this amounts to 4.8 per cent, which is higher than the "best buy" cash ISAs. It is a worthwhile option for James considering he already has a current account with the bank.

Then he can also pay up to £3,600 this tax year into a cash ISA such as the one from Standard Life Bank, paying 3.5 per cent. "It is expected that there will be further interest rate falls this year, and an account like this will help insulate his money," says Philip Pearson from IFA P&P Invest.

As James is building funds for a property purchase, any longer-term savings should be left until this is completed. "Once finances allow it, regular saving into an equity ISA, using a selection of funds with managers who have good track records, would be wise," adds Mr Pearson. "History shows that over periods of seven or more years, this approach will achieve a greater return than cash."



Retirement

The message on pension saving is that the sooner you start, the better, agree the advisers. "Even a modest monthly savings commitment will create a significant pension fund over the long term," says Mr Pearson.

The IFAs add that if James falls into the higher-rate tax bracket over the next few years as his salary rises, pension savings will become even more worthwhile. His contributions will be highly tax-efficient as he benefits from 40 per cent relief.

"The best way of saving into a pension would be for his employer to pay a contribution on top of his salary when he reaches the higher-rate band,"adds Mr Norton. "Otherwise, any income drawn above this will be taxed heavily."

A stakeholder pension plan would be a good home for this cash, with no initial charges and annual management fees capped at 1.5 per cent. Recommended providers include Norwich Union and Standard Life.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
Emma Watson has become the latest target of the 4Chan nude hacking scandal
peopleThreats follows actress' speech on feminism and equality at the UN
News
Alan Bennett criticised the lack of fairness in British society encapsulated by the private school system
peopleBut he does like Stewart Lee
Sport
David Moyes and Louis van Gaal
football
Arts and Entertainment
Sheridan Smith as Cilla Black and Ed Stoppard as her manager Brian Epstein
tvCilla Episode 2 review: Grit under the glamour in part two of biopic series starring Sheridan Smith
PROMOTED VIDEO
Life and Style
tech
Life and Style
Alan Turing, who was convicted of gross indecency in 1952, was granted a royal pardon last year
life
Life and Style
life
Arts and Entertainment
Tennis player Andy Murray's mum Judy has been paired with Anton du Beke for Strictly Come Dancing. 'I'm absolutely delighted,' she said.
tvJudy Murray 'struggling' to let Anton Du Beke take control on Strictly
Life and Style
Vote with your wallet: the app can help shoppers feel more informed about items on sale
lifeNew app reveals political leanings of food companies
Arts and Entertainment
The cover of Dark Side of the Moon
musicCan 'The Endless River' carry on the tradition? See for yourself
Sport
New Zealand fly-half Aaron Cruden pictured in The Zookeeper's Son on a late-night drinking session
rugby
Extras
indybest
Voices
A new app has been launched that enables people to have a cuddle from a stranger
voicesMaybe the new app will make it more normal to reach out to strangers
Arts and Entertainment
Salmond told a Scottish television chat show in 2001that he would also sit in front of a mirror and say things like,
tvCelebrity Trekkies from Alex Salmond to Barack Obama
News
i100
Life and Style
food + drink
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Trainee / Experienced Recruitment Consultants

    £20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

    Trainee Recruitment Consultant - Soho

    £20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

    Trainee Recruitment Consultants - Banking & Finance

    £20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

    Quantitative Risk Manager

    Up to £80000: Saxton Leigh: My client, a large commodities broker, is looking ...

    Day In a Page

    Secret politics of the weekly shop

    The politics of the weekly shop

    New app reveals political leanings of food companies
    Beam me up, Scottie!

    Beam me up, Scottie!

    Celebrity Trekkies from Alex Salmond to Barack Obama
    Beware Wet Paint: The ICA's latest ambitious exhibition

    Beware Wet Paint

    The ICA's latest ambitious exhibition
    Pink Floyd have produced some of rock's greatest ever album covers

    Pink Floyd have produced some of rock's greatest ever album covers

    Can 'The Endless River' carry on the tradition?
    Sanctuary for the suicidal

    Sanctuary for the suicidal

    One mother's story of how London charity Maytree helped her son with his depression
    A roller-coaster tale from the 'voice of a generation'

    Not That Kind of Girl:

    A roller-coaster tale from 'voice of a generation' Lena Dunham
    London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

    London is not bedlam or a cradle of vice

    In fact it, as much as anywhere, deserves independence
    Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

    Vivienne Westwood 'didn’t want' relationship with McLaren

    Designer 'felt pressured' into going out with Sex Pistols manager
    Jourdan Dunn: Model mother

    Model mother

    Jordan Dunn became one of the best-paid models in the world
    Apple still coolest brand – despite U2 PR disaster

    Apple still the coolest brand

    Despite PR disaster of free U2 album
    Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

    Despite the result, this is the end of the status quo

    Boyd Tonkin on the fall-out from the Scottish referendum
    Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

    Manolo Blahnik: Flats, Englishness, and Mary Beard

    The shoe designer who has been dubbed 'the patron saint of the stiletto'
    The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

    Scrambled eggs and LSD

    Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
    'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

    'Normcore': Blending in is the new standing out

    Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
    Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

    New leading ladies of dance fight back

    How female vocalists are now writing their own hits