As a newly qualified teacher at a comprehensive school in Warminster,
Wiltshire, Joe Kenrick faces the unenviable daily challenge of gaining the
respect of a class full of 15-year-olds.
Joe, 26, admits it is tough but thinks he is winning the battle. “It is hard
and the kids can be challenging, but it is basically a good school and my
colleagues are very supportive,” he says.
Joe, who teaches English and media studies and coaches a school football team,
will qualify fully in July this year, pending the results of his lesson
assessments. His salary will also rise from £21,195 to £22,500. With this
milestone passed, and the increased financial stability it will bring, Joe
will turn his thoughts to buying his first home.
At the moment he is paying rent for a room in a large Georgian townhouse at a
rate of £350 a month, excluding bills. Joe describes this as “extortionate”,
adding: “There are so many things wrong with this place, including damp. I
am desperate to get out.”
He wants to buy soon but is waiting for a £10,000 deposit, which he is due to
receive from his mother in a few months. He is looking for a two-bedroom
house, possibly in need of renovation, in or near the outskirts of Bath for
£130,000 to £140,000. “I love Bath itself,” he says, “but houses here are
really expensive for first-time buyers.”
Joe is hoping to buy with his brother, who lives in Loughborough, and take a
lodger to cover his brother’s half of the mortgage. His brother has about
£15,000 to put towards a deposit. Alternatively, his mother would be willing
to act as guarantor on his mortgage. She is also considering taking out an
unsecured loan for £30,000 or borrowing this amount on her own mortgage to
help Joe on to the ladder.
With so many options, Joe wants to know what would be the best mortgage and
which plan is more sensible: to buy with his mother or brother and should
they wait until they have a bigger deposit?
Joe says: “I have done some research but want reassurance that what we are
planning is a good idea. I don’t want to compromise living standards or go
into debt just to get on the property ladder.”
He has about £500 in an Isa that will also go towards the deposit and is due
to receive a bonus of £4,000 in September. He will put some of the bonus
money towards any renovations that need doing and general buying costs, but
he will save some to help him to pay off his other debts.
Joe says that he is almost permanently overdrawn on his NatWest graduate
account, by about £1,800. He does not pay interest on this yet, but will
have to do so from September if he does not reduce the overdraft to £1,000.
He also has student debt of £15,000, which he is paying back at £46 a month.
“It costs a lot to become a teacher,” he says, “I don’t really notice the
£46 a month, but the amount of debt is annoying all the same.”
On top of debt repayments and rent, Joe estimates that monthly outgoings on
household bills, food, clothes, transport and trips to the pub total about
£600 a month. “A lot of my friends live in London, so visiting them can be
expensive. I am trying to get them to visit me to save money.”
Joe contributes to the teachers’ pension scheme but does not have any other
private pension arrangement. He would like to know how much he will receive
in retirement if he invests only in the teacher’s pension and how much extra
he should consider investing privately. “I don’t know where to start with
pensions,” he admits, “I haven’t even thought about it.”
Joe also has £1,000 in shares, spread between Aviva and HBOS, and £500 in
Premium Bonds. He is not interested in further stock market investments at
this stage and wants to know if he would be better off converting his shares
into a personal pension.
Joe’s response
“I think it would definitely be better if I went for a fixed rate when I buy.
I expect my monthly repayments to be up to £500 and I will have to adjust my
spending accordingly.
“I will not use all of my spare cash for a deposit. There are too many unknown
expenses. Things will be tight for the first year or so, but hopefully, if I
progress in my career, it should become much more straightforward.
“The pensions advice seems sensible. I think I will wait until after I have
bought a house before making any decisions. If I start paying into a scheme
now, I may not be able to afford to buy a property.
“I have been given a cheaper renting option from this summer, which is
tempting, but house prices do not seem to be slowing around Bath so I really
want to take the plunge.”
Joe Kenrick: what the experts say
MORTGAGES 1
Nick Parkhouse, associate director, Savills Private Finance
“Joe needs to retain enough cash to meet his outgoings, so the bulk of his
bonus should go towards this before he thinks about buying a house. When he
does buy, he should bear in mind that he will have to pay stamp duty of 1
per cent if the property costs more than £125,000.
“Joe and his brother need to understand the complexities of purchasing
together as this may complicate matters. There may be legal issues about how
much equity each owns if they put in different deposits. In addition, Joe’s
brother will be responsible for all the monthly repayments if Joe defaults
on the mortgage.
“A better option may be a specialist scheme to enable Joe to buy using his
mother’s income and home as security. Bank of Ireland has a First Start
mortgage that would allow them to take out a joint mortgage so that Joe
could use the joint incomes to enhance his borrowing capability. The amount
would depend on the incomes of both Joe and his mother and any outstanding
mortgage that his mother has. Joe could still own the property in his name.
“Assuming that he borrows £125,000, monthly outgoings will double to between
£600 and £650. A lodger may be a solution, but Joe should
consider how he would maintain repayments if there is a void period. I would
recommend a fixed-rate mortgage for the first couple of years so that he
knows the exact repayment amount.
“The scheme allows up to 95 per cent borrowing, so Joe could retain some of
the £10,000 lump sum — instead of using it all for the deposit — to clear
his overdraft or place it in a high-interest savings account with easy
access as an emergency fund.”
MORTGAGES 2
James Cotton, specialist, London & Country Mortgages
“Joe is at the top of his budget as far as living expenses go, so he should
not pay much more on mortgage repayments than his current £350-a-month rent.
If he commits to higher repayments, he could overstretch himself.
“Therefore, getting a mortgage on his own is probably beyond his budget. A
£120,000 repayment loan over 25 years would cost about £720 a month, or £525
on an interest-only deal. On top of that he would have council tax and other
bills.
“If he buys with his brother, the bigger the deposit the less they will have
to borrow and the lower Joe’s monthly repayments will be. A deposit of
£25,000 should give them access to the best deals. If they buy for £140,000
and put down a £25,000 deposit, they will need a £115,000 mortgage. This
would cost about £680 a month on repayment or £500 on interest only. The
interest-only figure looks more appealing but they would have to make
provision for repaying the debt at the end of the term.
“This is one situation where a fixed deal is definitely worth considering
because it will give Joe the ability to budget.
“I would also be wary of buying any property that needs a lot of renovation
work. Such work often requires a lot more time and money than first thought
and it may be too much for Joe to cope with as a first-time buyer,
particularly if he will be relying on the income from renting out a room.”
PENSIONS
Rachel Jefferson, executive consultant, Torquil Clark
“Joe is lucky to be on a final-salary pension scheme, which means that
benefits depend on the number of years he is in the scheme and his salary.
The retirement age for the scheme is 60 and the amount Joe receives will be
based on the following formula: service multiplied by salary, divided by 80.
“I would advise that Joe uses the calculator on the website
www.teacherspensions.co.uk. Assuming his final salary is £22,500, he could
expect an income of about £9,500, but his income will increase over the next
34 years. The website allows you to experiment with different figures.
“Joe could boost his retirement income by purchasing additional years in the
scheme, by paying additional voluntary contributions to Prudential, which
administers the teachers’ scheme, or paying into a private pension, such as
a stakeholder plan.
“There is no right or wrong answer, but if he is likely to leave teaching, he
may wish to opt for his own plan. A Scottish Widows stakeholder with a
£100-a-month contribution until he is 60 could provide a pension of £12,400
a year.
“If Joe wanted, he could sell his shares and encash the Premium Bonds and put
the money in a pension to benefit from tax relief. However, this would mean
he could not access the cash until he is at least 55.
“An Isa would be an even more flexible option. These are open-ended and can be
cash or equity investments. There are no restrictions on how you take the
benefits and you are not taxed on the proceeds.”
LINKS
Savills Private Finance: 0870 9007762, www.spf.co.uk;
London & Country Mortgages: 0800 9530304, www.lcplc.co.uk;
Torquil Clark: 0800 0723186, www.torquilclark.com.
