‘Can I travel and buy my first home with £37k?’
This reader wants to spend six months in Asia and buy a flat, writes Amelia Murray
Gemma Edwards, 27, has her sights set firmly on buying her first property. However, she also wants to travel. She has been looking at twobedroom properties near the centre of Manchester, which cost between £160,000 and £200,000 and would allow her to rent out a room.
Ms Edwards earns £25,700 a year as a business analyst and has healthy savings. She has £23,000 in a Santander 123 account, which pays 1.5pc interest on up to £20,000. She has £2,600 in her Santander Help to Buy Isa, which pays 4pc, and £10,900 in a NatWest current account. She saves up to £900 each month.
She currently lives with her parents and pays £50 a week rent. Each month she spends £150 on petrol and £10 on her mobile phone. She has a £4,420 pension and contributes £71.44 a month, matched by her employer. Her only debt is a £22,000 student loan.
While getting on the property ladder is a priority, Ms Edwards also wants to travel. She said: “I’ve got no responsibilities or dependants – if I don’t go now, I never will.”
She is planning a trip to Asia in April for six months, which she expects to cost between £5,000 and £10,000. She is anxious that the cost does not “eat through” the £25,000 to £35,000 she has earmarked for her house deposit.
Ms Edwards’ company may allow her to take a sabbatical but she said “nothing is set in stone”. Ms Edwards will need to think long and hard about her next steps if her company doesn’t allow her to take a sabbatical. This decision might depend on how confident she is that she could come back and find another job easily.
She has built up her cash savings, which puts her in a much stronger position to buy a property.
She is quite rightly using the Help to Buy Isa and saving the maximum £200 each month into it. These savings will benefit from a 25pc government bonus when she buys her first home.
Depending on Ms Edwards’ future plans, she could consider the Lifetime Isa, which will be launched in April.
This is potentially a superior product to the Help to Buy Isa in that she can contribute more and probably have a greater choice of saving or investment options.
As she plans to use her savings towards a mortgage deposit, I would suggest keeping her money in cash. It is dangerous to invest money in stocks and shares when she might need it in the next few years, and this is especially the case with stock markets currently riding high and so potentially being quite expensive.
The Santander 123 account has been incredibly popular because it previously paid a generous interest rate of up to 3pc. However, it now offers only 1.5pc a year on savings up to £20,000 – any savings in excess won’t earn any interest. There is also a £5 per month fee on the account.
Ms Edwards should therefore review her savings accounts and see if she can get a better deal elsewhere, at the very least for the money on which she is earning no interest.
Cash savings rates are very low but Ms Edwards should look for easyaccess accounts as she is likely to need her money in the short term, either for travelling costs or a mortgage deposit.
She could consider the Bath Building Society Direct Saver account, which pays 1pc a year, the Virgin Money Defined Access E-Saver, which offers 0.95pc, or the West Bromwich Building Society Direct Limited Access Saver, which pays 0.85pc. All pay more than her NatWest account, which pays nothing.
Ms Edwards’ expenses will rise significantly when she moves out of her parents’ house and buys her own property. “Rent-a-room” tax relief means she can receive rental income from a lodger of up to £7,500 a year tax free.
She is paying a relatively small proportion of her salary into her pension and should see if she can increase it. Ms Edwards has built up a good level of savings, no doubt by living with her parents. Given that she seems keen to achieve her two goals – travelling and buying a house – in the next 12 months, investment in the stock market is not advisable.
She could see some growth but she could also potentially see a loss.
Ms Edwards has sufficient funds for her house deposit but not if she is going to spend between £5,000 and £10,000 travelling. She will need to save another £5,000 as a minimum.
She should keep a minimum of £20,000 in the Santander 123 account as this pays 1.5pc, which is attractive in the current environment.
She should also continue to save £200 into her Help to Buy Isa as it pays a decent return. Ms Edwards could also put £10,000 in Premium Bonds. There is no interest but there is the potential for winning cash prizes.
Ms Edwards should also put £200 each month into Santander’s E-saver and earn 3pc interest. She must save into it for a year.
When she returns from her travels she can begin to think about her finances in regard to her property purchase. The best mortgages are for buyers with a deposit of 35pc to 40pc. However, a 20pc deposit is decent and Ms Edwards should still be able to get a competitive rate.
As a minimum she will need a deposit of 15pc. On a purchase price of £160,000 that means a deposit of £24,000. I would suggest that she try to save for a 20pc deposit of £32,000 if possible as she will get a better rate.
You can typically borrow four to five times your salary, so if she is able to return to her previous job she will be able to borrow between £100,000 and £125,000.
Ms Edwards will also need to budget for stamp duty of 2pc, which will be around £4,000. She needs to be mindful of what she can afford in terms of mortgage repayments.
If she borrows £125,000 over 30 years at 2.5pc, this would cost about £500 per month. Over 40 years she would pay £415 monthly.
Gemma Edwards should keep her savings in cash, our experts said