Thousands of graduates would give their right arm for a £200-a-month flat in Central London. Chris To, 26, simply moved in with his grandmother, near Carnaby Street in the shopping heartland of the West End.
Chris has lived there for three and a half years since he graduated from St Mary’s College, University of Surrey, and joined the Civil Service. His sister, Gabrielle, 28, a PA at the Natural History Museum, also shares the flat.
Living with your grandma might be one compromise too many for some twentysomethings, but not for Chris. He says: “We’re a close family and she likes having us around.”
Restaurants, attractions and work are all nearby, so Chris and Gabrielle can walk everywhere, saving thousands in travel costs. The siblings pay only £200 a month each, but they cannot stay there for ever. They hope to buy their own place together soon, in South or West London.
With the help of a £30,000 deposit from their parents, Chris and Gabrielle estimate that they will be able to afford a two-bedroom property worth about £170,000. Chris says: “We want to buy sooner rather than later. With the threat of interest rate rises and house prices going up and up, it will only get harder.”
But Chris has a dilemma. During his four years at university, doing French and European studies, he took out a student loan. His parents paid half his living costs, allowing Chris to invest the rest of the cash in a mini-Isa. He now has £13,000 of savings but is unsure whether to put this towards the deposit or use it to pay off his student loan, currently £12,000.
Alternatively, he is considering putting the money in an investment scheme or maxi-Isa in the next financial year, or leaving the money where it is and continuing to add to his cash mini-Isa with Marks & Spencer Money, which pays a rate of 4.75 per cent. Chris is paying £250 a month into the Isa and £150 a month into an HSBC Flexible Saver account, which pays 3.15 per cent and has a current balance of £800.
Chris and Gabrielle are also considering buying a property and one of them moving in while the other stays with their grandmother. They could then let the other room to a friend until Chris has accumulated more savings and can more easily afford his share of the mortgage.
Chris earns £20,500 a year and is not optimistic about receiving dramatic salary increases anytime soon. “I really enjoy my job, but there are not many opportunities to move up and earn a lot of money.”
Despite his modest salary and high savings, Chris still manages to spend on clothes and going out for dinner with friends. He estimates that he spends £100 a month on eating out and about £500 a season on clothes. He spends £400 a month on his Nationwide credit card, but clears the balance every month.
Chris joined the Civil Service classic pension scheme in August 2003 but has no other pensions savings.
Chris To: what the experts say
Mark Dampier, head of research, Hargreaves Lansdown
“Chris has a huge advantage by being helped by his grandmother and is lucky to be in the Civil Service pension scheme. This means that he should not need to invest in a private pension.
“As he is looking to buy a house, long-term investment is not important now. But he could make more of his short-term savings. He should switch his pot from the HSBC Flexible Saver — there are other accounts that pay far more interest. I would suggest setting up a direct debit into a Birmingham Midshires direct telephone savings account, currently paying 5 per cent.
“From a purely academic point of view, it seems better to use his savings on a mortgage deposit instead of paying off the student loan. However, I prefer the idea of paying off the student debt and only having one loan. He can gradually reduce the mortgage over the years.
“Residential property is an overvalued investment. Interest rates are also rising, even if quite slowly. While investors will tell you that property is a long-term investment, most first-time buyers move within five years.
“If Chris is determined to buy, he needs a budget. Gas and electricity have been going through the roof and telephone charges, council tax and property maintenance will also take a big whack.
“Once Chris is more settled, he should consider three types of saving. First, he needs an emergency fund of at least three months’ net salary. Once this is in place, he can think about long-term saving. He should find out if he can make extra contributions to his work pension and gain tax relief.
“Unit and investment trust plans would also be cost-effective and efficient. There is no contractual term and no penalty should he withdraw money. Chris should consider general funds such as M&G Global Leaders and Midas Balanced, or a UK fund such as Schroders UK Alpha Plus.”
MORTGAGES 1
Rob Clifford, chief executive, mortgageforce
"Chris and Gabrielle are in a very good position. Given a purchase price of £170,000 and help from their parents, they require a mortgage of only £140,000. Their joint income is enough to achieve this. Repayments of about £800 a month should be affordable, but it makes sense to avoid future increases by considering fixed-rate deals.
“It is not essential for Chris to remain living with his grandmother and pay £200 monthly board while being named on the mortgage, but rental income from a friend is financially attractive. Most lenders will permit lodgers provided that tenancy rights are not created, but the lender must be consulted. The most straightforward solution is for Chris to move into the new property with his sister and use his savings to further reduce the mortgage.
“Most people in Chris’s shoes would keep their savings accessible, continuing the student loan because it has a low rate of interest.”
MORTGAGES 2
Andrew Strange, head of mortgages, Cavendish Young
“Any mortgage will represent an increase in expenditure, so Chris and Gabrielle should consider their purchase carefully.
“Chris’s student loan is a significant debt, but his repayments are only about £41 a month. Using a lender that considers affordability instead of income multiples will make the debt less crucial to the mortgage they can obtain, although he may like to repay it for peace of mind.
“They could secure a mortgage for a £170,000 property. Nationwide has a two-year fixed rate of 4.88 per cent, which should offer some surety of payments while they settle in. The mortgage would cost about £810 a month, assuming a 25-year term.
“If they let out a room, they could expect perhaps £433 a month in rent, which would cover half the mortgage. The rent-a-room scheme covers income only up to £4,250 before income tax is payable and the room itself must be let furnished.
“An alternative would be to continue to live with their grandmother and use the deposit to fund an investment property that they could rent out, hedging against further property price rises. This would open up the option of buying outside London, although the risk of loss in a declining property market should not be underestimated.
“Not all buy-to-let lenders accept first-time buyers, but Northern Rock or Mortgage Express would look at their situation. Northern Rock could lend £120,000 to make a purchase price of £150,000 with their deposit. They have a fixed rate until November 2008 of 5.99 per cent with no arrangement fee. On a mortgage of £120,000, their interest-olnly payments would be £599 a month. It is possible they would lose money in the short term, but it could represent a good investment in the long term.”
“I think that I will put the savings towards a deposit for a flat. However, I may make additional one-off payments towards the student loan when I can.
“Gabrielle and I agree that we should take out a fixed-rate loan initially and are inclined towards letting out a room, but we will consider the issues relating to tenancy. Using our first property as an investment does sound tempting but it would be too risky at the moment.
“We need to consider that we will not only be paying off the mortgage every month but will have additional bills such as council tax, electricity and gas, which will affect how much we afford to borrow.
“I will move my savings after we have sorted the mortgage and will also try to open an online account that pays more interest.
“I also intend to find out more about investment trust plans. I had been considering whether it is worth making additional contributions to my Civil Service pension and plan to do so as soon as possible.”
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