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; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Property
house + home
Arts and Entertainment
tvGame of Thrones season 5 ep 4, review - WARNING: contains major spoiliers!
Life and Style
Bats detect and react to wind speed and direction through sensors on their wings
tech
Arts and Entertainment
The Ridiculous Six has been produced by Adam Sandler, who also stars in it
filmNew controversy after nine Native American actors walked off set
Sport
Danny Jones was in the Wales squad for the 2013 World Cup
rugby leagueKeighley Cougars half-back was taken off after just four minutes
Life and Style
The original ZX Spectrum was simple to plug into your TV and get playing on
techThirty years on, the ZX Spectrum is back, after a fashion
News
Tiger Woods and Lindsey Vonn are breaking up after nearly three years together
peopleFormer couple announce separation in posts on their websites
Sport
football
Life and Style
Google celebrates Bartolomeo Cristofori's 360th birthday
techGoogle Doodle to the rescue
Arts and Entertainment
Haunted looks: Matthew Macfadyen and Timothy Spall star in ‘The Enfield Haunting’
tvThe Enfield Haunting, TV review
Finacial products from our partners
Property search
  • Get to the point
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

    Recruitment Genius: Claims Administrator

    £16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

    Recruitment Genius: Senior SEO Executive

    £24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

    Recruitment Genius: Online Customer Service Administrator

    £16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

    Recruitment Genius: Digital Marketing Executive

    £18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

    Day In a Page

    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

    Everyone is talking about The Trews

    Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living