With mortgage deals for first-time buyers as scarce as a hen's teeth, Rich
Hodgson and his partner, Sarah Cann, have decided that their best bet is to
put off trying to buy their first home and concentrate instead on saving a
deposit.
Rich explains: “The situation with property prices and mortgage rates is so
turbulent that we think that all we can do is save hard and hope to be able
to get a good deal in the future. We want to save at least a 10 per cent
deposit and buy in two years' time.”
The couple and their first child, eight-week-old Arthur, live in a rented
cottage in Exeter, but Rich, 37, says: “Ideally, we would like to buy a
three-bedroom place with a garden, either in one of the villages around
Exeter or in a quiet area of the town.”
Rich is a BT customer service coach and earns £23,500 a year. Sarah, 32, is a
recruitment consultant on a basic salary of £21,000, but she can earn up to
£30,000 with commission. She is currently on statutory maternity pay of
about £112 a week and is due to return to work full time in March. Rich
says: “We will have to pay for full-time childcare for Arthur. We haven't
looked into the costs yet, but we are aware that we need to do so as a
matter of urgency.”
Rich pays £117 a month into BT's final-salary pension scheme, but Sarah has no
pension. “We would like to put enough into pensions to live modestly but
comfortably when the time comes,” Rich says.
The couple's monthly outgoings include £795 rent, £230 on council tax and
utility bills, £370 on food and about £200 on socialising. Rich is a
fairweather golfer and motorcyclist, spending about £70 a month on both
during the summer. Sarah spends £50 a month on petrol. Rich says: “I cycle
to work at Exeter Quay. The six-mile round trip keeps me fit.”
A recent additional expense is the £40 a month they have to pay for nappies.
And Rich will also be paying £71 a month for the next year for a Microsoft
engineering computer course. “I started it a few years ago, but lost
interest in computers,” he says. “It was an expensive mistake.”
Rich's savings are with Abbey - £5,000 in an Easy Isa, at 4.05 per cent, and
£1,000 in an eSaver account, at 4.4 per cent. He also has £500 in Premium
Bonds. He holds BT shares worth £1,303 and invests £50 more every month, as
well as putting £250 into the BT employee sharesave scheme. “I have about
£10,600 in the scheme,” says Rich, who can sell about £4,000 of shares when
the option matures in August. He plans to put most of the cash in his Isa
and the rest in his eSaver account.
Rich also dabbles in the stock market, adding: “I have £100 in Ashstead, which
rents out industrial equipment. I also put £100 into IP Group, which
commercialises intellectual property. It represents a Bristol university
group that invented chewing gum that doesn't stick to the pavement. I
thought that it might be bought out by Wrigley and give a decent return.”
Arthur's £250 Child Trust Fund voucher is with the Children's Mutual. Rich
says: “We have decided not to add to it. We feel that having access to a
large sum at age 18 is too young. Instead, we intend to start a savings
account that he could use as a deposit on a house one day.”
Rich and Sarah: what the experts say
SAVINGS & INVESTMENT
Mark Dampier, Hargreaves Lansdown
“First let's take savings. Both the Isas and the saving accounts with Abbey
don't look competitive. The Birmingham Midshires eSaver offers 6.51 per
cent, while HSBC's cash e-Isa offers 6.25 per cent, though rates are
changing rapidly. I suggest that Rich and Sarah channel as much cash as
possible into savings accounts and Isas to put a significant chunk of equity
into a property in due course.
“On stock market investments, I wouldn't bother at £100 a time. The dealing
costs eat up a lot. Rich is also putting significant sums into BT's share
scheme - if you work for and buy shares in a company, you can come unstuck
if it hits bad times. But BT shares do look undervalued and have an
excellent yield.
“I applaud the idea of saving for a property deposit for their son, but first
they must first save for themselves. I recommend cash savings equivalent to
between three and six months' salary, in case of redundancy or emergencies.
They can then add to the Children's Mutual fund and I would also suggest the
Aberdeen Global Emerging Markets fund and Invesco Perpetual Income.
“Rich's final-salary scheme is probably the best type of company pension, but
he should review his annual benefit statement to determine whether this will
give him sufficient income when he retires.
“Sarah should consider a pension in her own name. If there is an employer's
scheme she can join, she should do so. She could pay up to 100 per cent of
her earnings into a pension and still receive tax relief. Contributions of
£100 a month - which will cost only £80 after tax relief - from now until
retirement could grow to £160,000, based on a 6 per cent return, providing a
pension of £10,400 a year. Inflation will erode the value, resulting in
buying power of £4,000 a year.”
Action plan
Switch Isa and savings accounts for better rates and save into these for a
property deposit.
Save a cash emergency fund.
Look at Aberdeen and Invesco for Child Trust Fund investments.
Sarah to start a pension.
SAVING FOR A DEPOSIT
David Holingworth, L&C Mortgages
“Like many potential first-time buyers, Rich and Sarah intend to wait to see
how the market pans out, rather than rush to buy now. First-time buyers
usually win out in a falling market because it offers a more affordable step
on to the property ladder. However, current market volatility has brought
about a tightening in lending. Mortgages offering a high percentage of a
property's value are thin on the ground and 100 per cent mortgages have
disappeared.
“This means that Rich and Sarah need to save hard for a deposit. Some lenders
are offering deals for up to 95 per cent of a property's value, but choice
is much reduced and the lending criteria are tough. To broaden their choice,
they should aim for as large a deposit as possible, preferably 10 per cent
or more. They also need to factor in the other costs of buying a property:
surveys, mortgage arrangement fees, legal costs and stamp duty.
“How much they can borrow will depend on their income. In their favour, Rich
and Sarah have no debts to erode their borrowing capacity. They should work
on a multiple of between three and a half and four times income. Criteria
vary between lenders and many now work on affordability models, but this at
least gives a rough idea.”
Action plan
Save at least a 10 per cent deposit to get the best mortgage deals.
Factor in saving for surveys, legal costs and stamp duty.
As a rough idea of what they are aiming for, work on being able to borrow
between three and a half and four times joint income.
MORTGAGE & SAVINGS
Ray Boulger, John Charcol
“The rent of £795 a month that Rich and Sarah currently pay would cover a
mortgage of about £125,000 on a 30-year repayment deal at 6.5 per cent, or
an interest-only mortgage of about £145,000 at the same rate.
“As for buying in 18 to 24 months' time, the availability of mortgages at that
time for borrowers with a small deposit is an unknown. If it is still
difficult, there could be other options - some developers now offer new
homes for 75 per cent payable now and the balance within ten years, with no
interest charged on that balance for at least five years.
“I would advise Rich and Sarah to keep an open mind on when they buy because
the best bargains will have gone if they wait until the market has bottomed
out. Meanwhile, the more they can save, the more options they will have when
they decide to buy.”
Action plan
Keep an open mind about when to buy, to avoid missing a bargain.
Save as big a deposit as possible.
If getting a full mortgageis difficult, consider new-build schemes.
Rich's response
“Mr Dampier is right about changing to a more competitive Isa, but I will
continue to put money into the BT sharesave scheme, as I can't see how I can
lose. The cash is protected and I am guaranteed to get back what I put in if
the shares are below what I paid for them when they mature. If they do well,
I stand to make a very decent return.
“The overall advice from all three experts is to keep saving for a house
deposit, look more closely at our pension arrangements and be more tenacious
in searching for a better return on our savings. We will try to be more
proactive in all these areas.
“We will certainly keep saving hard and wait for the right moment to present
itself (or a fairy godmother to appear) in terms of buying our own property.
“Thank you Money MoT; this has been an extremely useful exercise.”
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