Case Study - Buying A House

A recent case study for a National Newspaper:

The Daily Telegraph recently asked us to comment on a reader who had sent in a question. This is what we said:

I have recently qualified as a nurse and have just started my first job with a salary of £21,600 per year. My wife has a job which pays £20,000 per year, which is on a 1-year rolling contract. Our main financial goals are modest: To buy a house as soon as possible and a second car and set up a plan that will hopefully enable my wife to retire at an earlier age than 68 so that we will be able to spend time traveling once I have reached retirement age at 68. We have no debts at all, apart from my student loan which I will start paying off from this month as I have just started my job in an NHS hospital) and a £25 credit card debt. My wife will qualify as a first time buyer, however I will not due to having inherited a share in a house (which I have subsequently sold) 5 years ago. I have used £20,000 of the £50,000 I received for this to finance my university degree for the past 4 years. We currently have £30,000 in cash savings which are as result from an inheritance I had 5 years ago. This money has recently been spread over a number of high-interest current accounts, after having languished in a 0.5% ISA for a long time. I will pay into the NHS pension scheme from November onwards. I do not have any other investments or savings. My wife pays £180 per month into her company's pension scheme. Our attitude towards investments is very cautious. We prefer not to have any debts (even though apparently it is good to have some debt??) and would like to buy a house as soon as possible as we are worried about my age and lack of pension. We are also worried about rise in interest rates. We are both very inexperienced in financial matters and would benefit from some solid advice to set us up.

Your most immediate and ambitious plan is to buy a house, for which I would say you are on a firm footing. Lenders will not be too bothered about whether you are a first-time buyer or not. The deals are very similar nowadays. Likewise a one-year rolling employment contract, as long as this can be confirmed in writing, should not be an obstacle. You will need to have been in employment for a minimum of three months and so may need to wait for this period until you consider purchasing.

Having some credit history is good and so a credit card which you are able to manage will be beneficial. If this is the only credit you have had outside of the student loan this may not help your credit rating. The student loan itself will not hurt: merely the monthly cost will be deducted from any affordability calculation.

You could borrow up to £187,200, which added to your savings would equate to a maximum house purchase price of approx. £217,000. I would suggest less, to leave funds for fees, an emergency cash reserve and possibly a car.

If you put £25,000 down on a £200,000 property The Coventry BS offer a 5yr fixed rate at 3.45% costing £871 a month with £1,000 of set up fees. This will give you certainty of outgoings in the early years. Or a £20,000 deposit on a £150,000 house would cost a more affordable £661 a month.

If your wife is to retire in 28 years, she will need to top up her retirement fund. She should certainly join her employer’s pension and consider either topping it up further, taking out a separate pension (possibly with more flexibility and choice) or using your Stocks & Shares ISA allowance, which need not be unduly risky. I would suggest perhaps in these early years going for a regular savings ISA – less tax efficient than a pension, but retaining full access in case life throws you a curve ball – indeed if you plan to have children, a war chest with immediate access would do no harm.

You can always add ISA funds to a pension at a later date if you are feeling secure in the short term. Don’t forget £1 put into a pension becomes £1.25 overnight with tax relief, which cannot be beaten. Magic!

Fidelity Funds Network offer a low cost stocks and shares ISA option with many funds available and for a client who is 3/10 on the risk scale with a long term investment horizon we would recommend the following funds: 18.5% Vanguard UK Long Duration Gilt Index, 24.5% Royal London Ethical Bond, 32% Neptune UK Mid Cap, 15% Baillie Gifford - Global Discovery, 10% M&G - Property Portfolio. As you can see the name ‘stocks and shares ISA’ is misleading: we have recommended less than half of your savings are in the stock market, as you are cautious.

Consider also building up a fund to be set aside for emergencies – of 3 to 6 months outgoings, so ideally between £7,500 and £15,000 over time.

Make sure that you are each adequately insured for death or ill health. There is little point planning to retire if your finances disintegrate before you get there! Buildings & Contents insurance is a must and should cost no more than £30 a month. Pure life cover for the mortgage would only cost £12.56 a month with Bright Grey, or including Critical Illness Cover would cost an additional £51.98 a month, also with Bright Grey.

Alternatively you could consider Income Protection which pays a tax free income if you are off sick increasing with inflation until you retire, recover or die and is in my view better cover than Critical Illness Cover. A policy each would cost a total of £49.53 with Friends Life and Aviva respectively, so slightly lower cost that the Critical Illness Cover. As with any insurance you need to ask yourself “if XXX were to occur, would my finances be devastated?” If the answer is “yes”, insure against XXX. Simple!

Overall, you are in a good position to take a large and weighty step forwards in your lives, while putting in place measures to protect yourselves too. It is an exciting time in life and I wish you all the best!