The Daily Telegraph - Saturday - Money
With £27,000 savings, can I buy property?
This reader has large savings, but can he afford to buy a £300,000 home in Surrey or Essex, asks Amelia Murray
Tom Gadsby’s goal to save up and buy a house is not dissimilar to the ambitions of other 24-year-olds. However, unlike many his age, he has already managed to build up a decent pot of savings. This is thanks to a 13-month stint working in Abu Dhabi in 2015.
Mr Gadsby was paid a generous day rate that amounted to around £4,000 a month tax-free, which meant that he saved a lot of this cash.
“It really was too much money,” said Mr Gadsby, who also had the cost of his accommodation covered by the firm for which he worked.
Mr Gadsby, who now earns £30,000 as a consultant for a freight and logistics company in London, has about £26,900 in cash savings, including £15,500 in Premium Bonds and £3,000 in a Help to Buy Isa. During a “good month” he is able to top this up with £200 of additional savings.
Should he keep his money in n cash or look to put it elsewhere? He said that he has a low-to-moderate attitude to risk and is concerned about the impact that Brexit might have on the financial markets, meaning he is a bit more cautious about investing his money.
He pays 3pc of his salary into a company pension, which is currently worth about £4,000. His company contributes 4pc.
Mr Gadsby shares a flat in West Kensington with his landlord and pays £650 a month in rent. He has no debts apart from a £13,000 student loan.
His plan is to save as much as possible in the next three to four years so that he and his partner – who will return from Dubai, where she is teaching, next summer – can buy their own home. The couple hope to buy a two-bedroom flat or house for £300,000 on the outskirts of London, perhaps in Essex or Surrey. They plan to put down a 10pc deposit.
Hayley North, a chartered financial planner at Rose & North, said:
As Mr Gadsby’s key goal over the short to medium term is buying a property, it makes sense for him to continue to hold most of his savings as cash, despite the risk of its value decreasing over time because of inflation.
Some of this risk can be offset by making the most of the Help to Buy and Lifetime Isa schemes, which benefit from bonuses from the Government.
A Lifetime Isa is designed to reward longer-term savings and can be used for a first-time property purchase as long as the purchase price is £450,000 or less.
The Help to Buy Isa is not suitable for Mr Gadsby if he plans to buy a property worth £300,000 as this exceeds the £250,000 limit for property value outside London.
If you transfer a Help to Buy Isa to a Lisa in the 2017-18 tax year, it does not count towards your Lisa allowance, meaning that there is scope to invest more to fully utilise the allowance and maximise your bonus.
Mr Gadsby and his partner need to consider how they will afford a property for £300,000.
Based on a salary of £30,000, he might be able to borrow around £135,000. If his partner earns the same, they might just be able to cover the borrowing under current mortgage rules. If not, they will need to save consid considerably more as a deposit.
Once he has bought a property, Mr Gadsby can consider other investments over the longer term.
He could always use his Lisa to top up his pension savings later on and could invest in stocks and shares as well as cash.
He would be penalised for withdrawing funds in a Lisa before age 60 (losing the 25pc bonus entirely) for anya reason other than a property purchase.
Nick Onslow, a chartered financial planner at Russell Ulyatt Financial Services, said:
It is clear that Mr Gadbsy is disciplined in his approach to saving and that he has put himself in a very strong position to buy his first house in three or four years.
He has a low-to-moderate attitude to risk and a short-term financial goal, and none of us can accurately predict what the triggering of Article 50 will bring.
Therefore, I would advise him to keep clear of stocks and shares as he doesn’t want any sharp falls in the value of his funds at the point that he wants to buy his new home.
If Mr Gadsby and his partner were considering purchasing a newbuild property, they might qualify for Help to Buy “equity loans” being offered by the Government.
It currently offers five-year interestfree loans that require only a 5pc deposit on new properties valued up to £600,000.
Mr Gadsby has already saved £26,900 in cash, so he needs to raise an additional £3,100 to have a 10pc deposit on a £300,000 property.
He needs to consider the extra costs associated with a house purchase such as stamp duty (£5,000), solicitors’ and removal fees. This could easily add a further £8,000 to £10,000 to the overall costs.
Mr Gadsby has been doing all the right things, especially taking advantage of the Help to Buy Isa, which means that each monthly contribution of £200 attracts a Government bonus of £50, up to a maximum of £3,000.
He should be aware that if he buys a property outside London the bonus is available only on home purchases up to £250,000.
Therefore this scheme may be unsuitable for his needs.
The new Lifetime Isa, introduced today, works in a similar way to the Help to Buy Isa.
Savers can contribute £4,000 annually into the Lisa and receive an additional 25pc as a bonus.
This will be paid annually in the first year and monthly thereafter. The benefit of this over the Help to Buy
Isa is that savers will receive regular interest on the bonus.
Mr Gadsby is able to retain his Help to Buy Isa and open a Lisa; however, he can use the Government bonus from only one of these accounts to buy his first home.
The Lisa bonus is available for home purchases up to £450,000. If he saves £16,000 over the next four years he will receive an extra bonus of £4,000.
He should look to open a Lisa, contribute £4,000 and also transfer in his Help to Buy Isa.
He may have to wait until at least June, when the first expected cash Lisa, from Skipton Building Society, is due to go on the market.
The savings he holds in Premium Bonds could be used to fund a Lisa over the next four years.
On her return to Britain his partner should also be able to take advantage of a Lisa.
Mr Gadsby could consider moving some of his cash savings to Santander’s 123 account, which pays 1.5pc on balances up to £20,000, subject to a monthly fee of £5.
‘It makes sense for him to hold cash, despite the risk of its value decreasing’