Wealth Check: 'Where do I start: A pension or a house?'
Living on a modest income in London means it's hard to take the first steps to build for the future
Sunday 25 November 2012
Rove Mejia, 28, needs advice on whether he should focus his finances on getting a foot on the property ladder or saving into a pension.
As a marketing analyst for Caxton FX, he earns £28,000 a year, and finds the cost of living in London means he has little spare cash to set aside every month. "I don't have a house or a pension at the moment so it's tricky to know where to start sorting out my finances," he says.
"At the moment my salary is paid into a Halifax Easycash account, but I'm considering opening an ISA [individual savings account] too, as I hear they are a good place to begin saving."
He pays £575 a month for a room in a two-bed flat in Tooting Bec, south London. However, Rove would like to get a toehold on the property ladder in the next few years. "But I'm not sure how best to go about this," he says. "Are there ways that will help me do that without really impacting on my current lifestyle?"
While he adds he could slot away spare cash from his salary, he is unsure what a "realistic target" would be for this. "At the moment I usually spend my wages, but I could cut back," he says.
Turning to debt, Rove has £10,000 in student loans to repay. But he steers clear of credit cards and personal loan debt. "I'm worried this might this go against me when it comes to getting a mortgage though, as I hear that not having a credit history will make it harder. Is there anything I can do about this?"
So far, he has chosen not to pay into a pension scheme. "I feel with the high cost of London life I couldn't really afford this, but now I want to start, I feel torn between this and saving towards my first home. Young people don't have it easy these days when it comes to knowing what they should prioritise."
He has no protection policies.
In an ideal world Rove should aim to save into a pension alongside building a fund towards a property purchase. However, our panel of independent financial advisers (IFAs) realise this could be tricky, particularly in the current climate.
"His first priority should be to build up cash savings, and once he has done this he will be able to look at longer-term priorities, investments and pensions," says Patrick Connolly from AWD Chase de Vere.
Draw up a budget
Rove should make a list of what he spends his money on. This should be simple and show where money can be saved by, for example, switching energy suppliers or cutting down on nights out.
Tony Byrne, from Wealth And Tax Management, adds: "He could, for example, start making his own lunch, and use cashback sites when shopping online. Cutting your expenditure will not only allow you to save, it will also show mortgage lenders that you have excess income in which you can accommodate your mortgage payments."
Unfortunately building up savings is likely to impact on Rove's lifestyle, but over time budgeting should become second nature and he will reap the rewards.
"But he can reduce the impact of this by carefully analysing the money he spends and to see if he can reduce any of his spending without impacting on his lifestyle," says Mr Connolly.
Build cash savings
Rove is currently without any "rainy-day" cash savings, and his priority should be to address this, stress the advisers.
Mr Connolly says: "Everybody needs cash savings to meet short-term emergencies or requirements without falling into debt."
Rove has an additional need for cash savings if he is hoping to buy a property over the medium term, as he will have to build a deposit in order to secure a mortgage.
As a starting point, he is right that he should start slotting away spare cash in a cash individual savings account. He is able to save up to £5,640 into a cash ISA in the current tax year and all interest earned is tax free.
Using a comparison site, such as moneyfacts.co.uk, will help him find the best rates.
If he can afford to save £400 a month into a cash ISA which pays 3 per cent interest, for example, he will be able to accumulate £15,000 over three years. The easiest way to save would be to set up a monthly direct debit from his current account on pay day into one of these accounts.
"He should save as much as possible, though at the same time be realistic and carefully manage his money to avoid inadvertently going into debt on his current account," adds Mr Connolly.
Buying a first property
Rove is keen to buy a house in the next few years, although this won't be a realistic objective unless he is able to save up the money for a deposit.
Flora Maudsley-Barton, from Parsonage, says: "It's difficult to know how much Rove will be able to borrow in a few years time, as rules change all the time. Today, he could probably afford to borrow about £112,000, a long way from the average London property price."
A solution could be to buy outside the capital, or look to purchase with a friend, or take advantage of a shared-equity scheme to give him a leg-up onto the property ladder.
Mr Byrne said: "He should aim to save at least 10 per cent of the property value. As a first-time buyer he could get a 95 per cent mortgage, but the rates will be uncompetitive.
"To get more choice and a better deal he should try to raise 15 per cent," says Mr Connolly. This might take some time, so he will need to be patient."
Another option is to apply to the Government-backed New Buy scheme, where he only needs to put down a 5 per cent deposit; however, it has to be a new-build property.
Lenders seek stability. Therefore, if Rove stays in the same job for some time, this will help his application.
There are also some steps he can take to help improve his credit rating and likelihood of being accepted for a good deal.
Rove should make sure he is on the electoral roll, says Ms Maudsley-Barton, and he should also avoid failing to pay bills. "Getting a credit card may help if he manages it correctly, but is unlikely to be the deciding factor in whether he is accepted or rejected," adds Mr Connolly.
He can order a copy of his credit report through one of the credit reference agencies such as Experian.
Dealing with student debt
As Rove started higher education between 1998 and 2011 he will be paying interest of 1.5 per cent a year. Repayments are set at 9 per cent of salary over £15,795.
"He should note that student loans aren't included on credit files," says Mr Connolly.
With such a low interest rate, there is no great urgency for Rove to pay off this loan.
Pensions and long-term investments
At age of 28, Rove should ideally be saving for the future. Unfortunately, that isn't the reality for many people, who face shorter-term priorities, such as paying off debt and trying to buy their first property.
However, he should check to see whether his company has a pension scheme and whether there are employer contributions or not, stresses Mr Byrne. If he isn't a member and his company will contribute, he is effectively turning down a pay rise.
Once he has tackled short-term savings he can look longer term. This should be through a combination of pensions, where he will benefit from initial tax relief, and stocks and shares ISAs.
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
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