Wealth check: 'How can I realise my dream of a house in six years'
Twenty something Alice Gerard-Pearse hopes to own her own home by the time she is 30
Sunday 15 April 2012
Alice Gerard-Pearse is clear that she wants to own her own home before she is 30. The 24-year-old works for a publishing company in London on a salary of £23,000, and has started saving towards her goal of home ownership.
So far, she has amassed £5,340 in an individual savings account (ISA) with Nationwide, paying 3.1 per cent, and around £4,000 in a savings account with the Post Office paying 2 per cent.
"I try to save around £300 to £500 a month but it varies depending on what my outgoings are," says Alice. "But I aim to take advantage of the best rates, and plan on making the most of the money I have this tax year – so I'm keen to know what the most attractive accounts are."
Alice also has two current accounts and a credit card with Nationwide on a rate of 12.9 per cent to cover day-to-day expenses, although she makes sure to pay off the balance on the card every month.
"I'm a loyal Nationwide customer and I've been with them for as long as I can remember," she says. "But perhaps I should move my money around more often."
Alice is saddled with around £20,000 in student loans from her university days, but is gradually paying this off from her salary each month.
At present, she is paying £410 a month to rent a room in a four-bedroom house in Tooting Bec, south London.
"I'd like to buy somewhere within the next six years, and hope I'm on the right track – I should have a good credit rating, but would like to know what I can do to put myself in a good position," she says.
"I'm not able to buy anywhere at the moment, and anyway, my rent is affordable, and my house is in a good location for transport and amenities, so for the moment I'm happy to stay where I am and continue to save for another few years."
For long-term planning, she is in the process of joining the money-purchase company pension scheme, and will start by contributing the minimum 3 per cent of salary, which her employer will match.
"I'd love to know what I should be doing to get myself in the best financial position possible for later life, including understanding my pension position, as I know the state pension age is due to rise which may affect me."
Alice is making sensible decisions to ensure firm foundations for her financial future, agree our panel of independent financial advisers (IFAs). She is slotting away savings, joining a pension scheme, and has clear objectives with plans to buy a property in the next six years – along with gradually reducing her debt.
However, there are tweaks she can make to maximise her position.
Saving to buy
The expert says Alice is wise to use a cash ISA towards saving to buy a property, given the tax-free interest that will build up over time. She should also consider shifting her savings with the Post Office to a cash ISA for this tax year.
As a Nationwide customer she can take advantage of the best rate on the market, at 4.25 per cent including a 2.25 per cent bonus until October 2013 for current account holders. From 5 April, the amount that can be saved into a cash ISA rose to £5,640.
She can't transfer her ISA from previous years into this account, but there are attractive accounts that allow her to do this, such as Santander's cash ISA paying 3.3 per cent.
"Alice could improve the rate by using fixed-term ISAs," says Danny Cox from IFA Hargreaves Lansdown, although he advises against tying money up for too long since there is usually insufficient additional interest.
Bob Hair from wealth management firm Turcan Connell says: "When reviewing the rates offered elsewhere it is very important to be aware of introductory bonus rates that may initially look attractive, but then reduce sharply after 12 months. This approach preys on inertia – and loyalty is often not rewarded."
However, he added that typically Nationwide offers decent rates.
Calculating the deposit
Alice should be able to target how much she will need to save to jump onto the property ladder, says Mr Cox. Under current market conditions, a deposit of at least 25 per cent of the purchase price should provide access to the best mortgage deals. Based on a property – or share of a property – of £150,000, this would be £37,500.
At Alice's current rate of saving she is well on her way to being on the property ladder by the time she is 30. If she benefits from pay rises she can also increase the amount she saves every month to speed this up.
To ensure her credit rating is squeaky clean for when she comes to apply for a mortgage, there are a few steps Alice can take.
Lenders have different requirements, but across the board it's necessary to avoid debt problems and be on the electoral register.
Mr Hair says: "It's important for Alice to be building up a credit history, and a credit card helps achieves this, assuming that she makes at least the required minimum repayment each month and therefore leaves a good history."
However, her student loan won't appear on a credit check.
"This is a low-cost form of finance and won't impact Alice's credit rating," says Mr Cox. "That said, lenders check affordability of repayments which will include the likes of student-debt repayment."
Once Alice has built up a deposit and bought her first property, she can consider a stocks and shares ISA, says Jaskarn Pawar of IFA Investor Profile.
"This can be used to invest money towards her future, as long as she is happy to leave the money invested for at least five years," he says.
Alice has joined her employer's pension scheme, which is a good move. If she hadn't joined she would be throwing away free money from her employer, who will also pay into the pension plan.
For a £46 reduction in her monthly net income, a total of £115 will be credited to her pension each month, based on basic-rate tax relief and a matching employer contribution of 3 per cent, says Mr Hair.
"Due to the benefits of compounding, contributions into a pension at a relatively young age can have a significant impact on the funds available when retirement approaches," he explains.
The state pension system is due for reform, says Mr Cox, and will become a flat-rate scheme of about £140 per week for those with 30 qualifying years working history.
However, Mr Hair adds: "Alice's state retirement age will be at least 68, but could be even higher as the Chancellor has announced his intention to link future state retirement age to increasing longevity.
"This makes it all the more important that Alice builds up personal funds to give her the flexibility to retire earlier than this if she wants."
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