The adviser: Philippa Gee is managing director of Philippa Gee & Co, fee-based independent financial advisers, Foresters Hall, 1A Wyle Cop, Shrewsbury SY1 1UT Tel: 01743 236982, e-mail gee@ compuserve.com
The advice: You have tried to maintain a balance with your existing savings. However, this has resulted in small sums invested, such as pounds 5 per month paid into a 10-year plan, pounds 500 into a Tessa and pounds 1,000 into a PEP, with limited results. I would advise against further investments of similar amounts and suggest that you concentrate on building up one holding until it reaches a more significant level. As you are planning to buy a flat within the next six to 12 months, your savings should be accessible rather than fixed or long term (eg a PEP).
You are interested in carpet bagging, although most new customers now have to sign agreements that any windfalls received within the first five years will be paid to a charity or are deterred by a combination of high minimum deposits (up to pounds 2,500) and low interest rates (1 per cent or less). With limited resources and a need for the cash, you may prefer to leave windfall hunting to others.
By saving a monthly sum of pounds 350, you will have a deposit of pounds 7,000 by the end of the year, but you need to face the reality that this should be increased. Assuming that you look at properties at the maximum end of what your salary would allow - say pounds 90,000 - you will need a deposit of at least 5 per cent. Any lower than this and you will edge towards a 100 per cent mortgage where, typically, the rates and charges are significantly higher. The general rule is the greater the deposit, the better the deal you get.
On top of the 5 per cent deposit (pounds 4,500) there are other costs, including stamp duty (1 per cent or pounds 900) and legal, mortgage arrangement and valuation fees (pounds 1,000 or more), leaving you with less than pounds 600 to meet your other expenses, removal costs, and furnishings. It is also advisable to have access to an emergency "float".
You have shares in Northern Rock valued at about pounds 3,000 which could be sold, although many stockbrokers view the share positively and if possible, advise that the shares are left. Instead, I suggest you concentrate on boosting your cash by saving more than the current pounds 350 and delaying the purchase for at least 12 months, by which time you will also have the maturity proceeds from your 10-year policy. With property prices in London increasing rapidly and interest rates low, I appreciate that you want to avoid delaying decisions for long, but a mortgage is a serious commitment and you shouldn't put yourself in the position of having high borrowings and no savings. An absolute minimum you need to aim for is pounds 10,000 on deposit and, after moving, continue saving to replenish the depleted funds, as you should have an emergency float of pounds 3,600 minimum.
You could look at a cash Mini-ISA, as you can invest up to pounds 3,000 now. Particularly appealing are the interest rates, paid free of tax and usually offering virtually instant access. One company you could consider is the Halifax, which is currently offering 6.5 per cent gross on pounds 3,000 and, of course, no tax to pay. Your existing savings account should be used for the other funds.
When you do look for a mortgage, you need to decide how to repay it and what type of interest rate to choose. If you are concerned about fluctuating mortgage payments and would like to lock-in to a scheme, a fixed rate may be the best option. However, if you are willing to adopt a less cautious approach, especially if you feel that mortgage rates are likely to fall further, you should consider a discounted rate or capped rate. With any scheme be wary of how long the initial rate lasts, any Early Redemption penalties (how long you are tied in once the low initial rate has ended), and fees for arrangement and valuation, as well as whether Buildings & Contents insurance is compulsory with the same lender, which can prove expensive. Above all, it really pays to shop around.
When looking at how you might repay the loan you have four main options: capital repayment, ISA, pension and endowment. Bearing in mind your particular circumstances, I would suggest either capital repayment or ISA. However, you do need to bear in mind that the latter is for a less cautious applicant who is willing, over the long term, to rely on gains from shares to repay the borrowings. You will also need to have adequate life cover and although your employer offers death-in-service cover, you will find that most lenders will insist on separate personal cover.
With you relying on your earnings alone and considering taking on long- term commitments, I would suggest that the costs of income replacement and critical illness cover are also investigated. However, sort out the mortgage out first and then establish any spare monthly income.
You are also concerned about your pension provisions, particularly as you wish to retire early. You are a member of a Group Personal Pension Plan, with you and your employer contributing about 15 per cent of your pensionable salary, which is very near the current maximum for you at this time of 17.5 per cent. Remember, pension provision is for the long term and you cannot access the funds beforehand. Therefore I suggest that you do not increase your provision at present. Instead, concentrate on building up your cash and obtain a projection of what the pension may pay at retirement to help identify any gaps, and then review the level pension contributions after you have moved.
By taking your time to save as much as possible now, you will be in a stronger position to locate both a suitable property and a competitive mortgage to help you fund it.