Cash clinic: Teachers put in homework
on costs of buying a house
Published: 14/08/2004)
This article appeared in The Saturday
Telegraph.
Getting on the first rung of the property ladder is proving to
be a tough project for a young couple living, for now, in Yorkshire,
writes Melanie Wright
Rising interest rates and house prices are making it difficult
for Luke France, 25, and his partner Victoria Leeper, 26, to get
on to the first rung of the property ladder.
The couple met while working for a language school in Guildford,
Surrey, two years ago, where Mr France was a sports and activities
director and Miss Leeper an English teacher.
They have been living together for a year in a rented two-bedroom
mid-terrace house in Beverley, East Yorkshire, but are thinking
about buying their own home.
Mr France, who is now working as a secondary school teacher,
said: "We are currently umm-ing and ah-ing as to whether
or not we should buy a property. In Beverley, houses like the
one we are living in tend to go for £115,000 to £120,000
but we have no idea whether the mortgage payments would be much
more expensive than the £425 rent we are paying.
"We are also considering going to live and work abroad in
a couple of years, and so would like to know whether it may be
better to hold on and then buy a property overseas instead. We
are thinking about Canada or New Zealand or, alternatively, if
we were to stay in Europe, southern France.
"My dad has said that he would consider helping out with
a deposit as an investment, so we could potentially borrow up
to £10,000 to put down on a property."
Mr France and Miss Leeper, now a primary school teacher, have
a combined monthly income of £2,200 after tax. Miss Leeper's
salary is paid direct into her Halifax current account and Mr
France's goes into a current account at Barclays. The couple pay
£550 each out of their monthly income into a joint account
with Barclays to cover rent, food, household bills and petrol.
As far as savings and investments go, Miss Leeper has £3,800
in Premium Bonds. Mr France said: "She has been quite lucky
with prizes. A month ago, she won £150 and she collects
the odd £50 now and then. I don't have any savings at present
but we could both feasibly set aside £100 a month to pay
into some sort of savings plan."
Both Mr France and Miss Leeper currently contribute £90
each a month into the Teachers' Superannuation pension scheme.
At the moment, the couple are trying to clear debts built up
at university. Mr France owes £2,200 on an MBNA credit card
and Miss Leeper owes £300 on a Halifax card. Mr France said:
"I have just transferred my credit card balance from Barclaycard
to MBNA because MBNA is offering 0 per cent interest on balance
transfers. Victoria has really been trying to pay off her credit
card, so she only owes £300 at the moment." Mr France
also pays £65 a month to his parents, who lent him money
to buy his car.
In addition to the car loan and credit card debts, Mr France
also owes around £7,000 to the Student Loans Company but
is deferring paying this off until his salary rises. For repayments
due in the current academic year (2003-2004), deferment is possible
if your gross income is £1,780 a month or less.
He said: "As I am earning £1,100 after tax, I have
the option not to pay it back now. When I do start, however, I
think the monthly payments will be in the region of £125."
Miss Leeper owes £7,500 in student loans. However, because
she teaches science in her primary school - and this is classified
as a "shortage subject" due to a lack of relevant teachers
- the Government is repaying her loans for her, under the Repayment
of Teachers' Loans (RTL) scheme.
What the experts say
Consultants to the Cash Clinic say Mr France and Miss Leeper
should concentrate on clearing existing debts and increasing their
savings before struggling to buy their home. Property prices are
at an all-time high and interest rates are rising, so the couple
should beware of over-stretching themselves.
Savings and investments
Miss Leeper's Premium Bonds are a safe home for her money but
Benjamin Gibbs of independent financial advisers (IFAs) Glazers
Financial Services, advised that she would do better putting her
money into a savings account. He said: "On average, Premium
Bonds pay out less than a good deposit account. She could keep
a small amount in these bonds to give her the chance of hitting
the jackpot."
Philip Pearson of Southampton-based IFAs P&P Invest recommended
that the couple make building up their savings a priority. He
said: "This can be done through the use of tax-free mini
cash individual savings accounts [Isas]. Abbey is currently offering
a competitive interest rate of 5.1 per cent on a minimum deposit
of just £1 with immediate access.
"A standing order mandate should be established for regular
monthly saving. I advise a minimum fund of three months' net income
to provide a contingency against uncertainties in the future."
If, later on, they want to build up medium-term savings, Mr Pearson
recommended a stocks and shares Isa. He said: "The Fidelity
Moneybuilder range of funds is worth consideration. With no initial
cost to invest and low annual management charges, they offer excellent
value for money coupled with high quality fund management. Monthly
savings are available at £50."
Pension
The couple are fortunate to belong to the Teachers' Superannuation
pension scheme, as it is a final salary scheme where benefits
do not depend on stock market returns and are, in effect, underwritten
by taxpayers.
Mr Gibbs said: "Mr France and Miss Leeper should not underestimate
the benefits of working as teachers in the state system. They
are members of a good pension scheme that promises to pay them
an income based on the salary they earn and the number of years
they have worked."
If they have not already done so, Mr Pearson recommended that
both Mr France and Miss Leeper complete nomination forms to ensure
their preferred beneficiaries receive payments, if one of them
dies before retirement age.
Debt
The experts commended Mr France for transferring his credit card
debt to a card where there is no interest charged on balance transfers
for the first six months. Mr Pearson said: "He should maintain
this strategy and at the end of the interest-free period consider
again a transfer to an alternative lender offering a 0 per cent
interest introductory period."
When it comes to the couple buying a home, James Cotton, mortgage
specialist at brokers London & Country Mortgages, said that
they may find it hard to borrow the amount they need to buy their
first property, based on their current incomes and with their
debts.
However, he acknowledged that the student loans may not necessarily
cause a problem as there is no actual outgoing at the moment.
Some lenders will take these into account, but others, such as
Abbey and Halifax, should not include them in their calculations.
All the experts agreed that Mr France and Miss Leeper should
try and get together as big a deposit as possible. Mr Cotton said:
"If they could put 10 per cent down, it should give them
the chance to borrow a bit more, and help them to avoid any higher
lending charges, known as Mortgage Indemnity Guarantee [MIG],
which can cost thousands of pounds.
"Some lenders, such as Nationwide, Cheltenham & Gloucester
and Northern Rock, do not charge MIG at all. In any case, they
must make sure that they have enough savings aside for Stamp Duty
and other costs."
Mr Cotton recommended a fixed rate mortgage for two or three
years, to protect against further rate rises. He said: "With
their income, they may want to consider Nationwide Building Society's
two-year fixed rate at 5.89 per cent, as Nationwide will look
at how much they can borrow on an affordability basis and tends
to be more flexible than some lenders. They can borrow up to 95
per cent of the property value.
"The rate drops to 5.39 per cent if the deposit is greater
than 10 per cent. There is no MIG or extended penalties. At a
rate of 5.89 per cent a £100,000 mortgage over 25 years
would cost £638 on a repayment basis, or £491 if the
mortgage is interest-only." The deal has an arrangement fee
of £349.
Protection
As the couple have no dependants and do not own a property, the
experts agreed that Mr France and Miss Leeper have no particular
need for life assurance.
Mr Gibbs from Glazers Financial Services said: "Primary
and secondary school teachers are fairly well catered for against
the risks that they die or fall ill. However, as Mr France and
Miss Leeper are not married, they should make sure that any death-in-service
benefits would be paid according to their wishes."
Mr Pearson also recommended that if the couple do buy a property,
they should write wills.
