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
Sunday 15 February 2009
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."
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.
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.
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.
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."
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
Five Questions: Changes to car tax discs
Ticking time bomb: Interest rate rises are coming, so start preparing now
Peer to Peer lending: This alternative market is offering firms a lifeline
More than 300,000 adults are too deeply in debt to apply for bankruptcy
What is pension death tax, what is going to change and how will it affect you?
- 1 Sainsbury's '50p challenge' poster telling staff to encourage customers to spend more placed in shop window instead of staff room
- 2 Five-year-old Iris Grace is raising awareness of autism through her extraordinary paintings
- 3 HeForShe campaign: Iceland to follow up Emma Watson speech with UN women's rights conference – for men only
- 4 Car tax disc changes: Two days to go - and they affect you much more than just not displaying a piece of paper
- 5 Teenagers irritable because early school hours mess with their biological clocks
Isis, we are told, is a 'clear and dangerous threat to our way of life'. I’m sorry, but I just don’t buy it
Exclusive: 'Putin's Russia has been my biggest regret,' says Nato's outgoing Secretary General
The Osborne Ultimatum: Chancellor’s benefits freeze bombshell will affect ten million households
There’s no excuse for Dave Lee Travis’s behaviour, but we need to keep a sense of proportion
Should gay sex be illegal? 16% of Britons think so
Mark Reckless becomes second Tory MP to defect to Ukip in a month
- < Previous
- Next >
iJobs Money & Business
£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...
NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...
£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...
Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...
Day In a Page
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
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors