‘Can I travel and buy my first home with £37k?’

The Daily Telegraph - Your Money - - MONEY MAKEOVER -

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

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