Wealth check: Is my deposit enough to buy my first home?

The patient

Caroline Bann, 30, wants to maximise her savings in preparation for stepping on to the property ladder in a year's time. "I plan to buy with my boyfriend," says the public relations executive for the Association of Accounting Technicians, who earns £24,000 a year. "So I've been building up cash for a deposit for this – and want to make the most of it."

So far, she has amassed £18,000, and plans to save a further £10,000 before taking the plunge. This includes £7,000 in a Lloyds TSB cash individual savings account (ISA) paying 1.5 per cent. The remainder is stashed in an easy- access savings account paying 1.75 per cent, also with Lloyds.

"I've been setting aside £1,000 a month for the past year," she says. "Along with money gifted from parents and grandparents, and a redundancy package of £7,000 from my previous employer, this will amount to around £45,000 by the time we buy."

Caroline, from Worcester Park, Surrey, currently pays £150 a month to her parents in rent. "I'm living at home while saving to buy, and have been doing so for the past year."

She hopes to buy with her boyfriend, who earns £23,000 a year. "He's not as good at saving, so he's hoping to have at least £5,000 by the end of next year to cover the additional purchase fees on top of the pot I'll have."

They plan to buy a two- to three-bedroom house in the Staines or Sunbury areas of Middlesex for £220,000. "And we're hoping to get a mortgage on this quite easily," she says.

Turning to debt, she has managed to wipe out the majority of her student loan, and has just £5,000 left to pay. "But I'm not currently paying this off as I deferred this when I was made redundant in May this year – I'll start again in March when the next deferment deadline is reached."

Thinking ahead, Caroline has contributed to various company pensions and one personal pension. "I have one from a job while I was working at Woolworths when I was 16 which I paid into for two years, and another with my previous employer which I contributed to for seven months," she says. She also has about £600 in a Lloyds Banking Group personal pension.

The cure

It is sensible to build as big a deposit as possible to avoid settling for the highest mortgage rate, stress our panel of independent financial advisers (IFAs). With a little planning, Caroline and her boyfriend will be the proud owners of their first property in the not-too-distant future.

Savings

Caroline has already saved a hefty sum. As she will need to put down a deposit on a home in a year or so, steering clear of stock-market investments is wise, as these require a longer-term commitment.

To benefit from tax-free interest, she should make use of her cash-ISA allowance – currently £3,600 per year, rising to £5,100 in April. But the rate on her current ISA is paltry. "With interest rates for savers at an all-time low, it's more important than ever to shop around to boost cash savings," says Philip Pearson from IFA P&P Invest.

For example, Abbey pays between 2.5 per cent and 3 per cent interest a year on its cash ISA. This includes a 2 percentage point bonus for 12 months, which suits Caroline's time frame. Alternatively, she could consider National Savings & Investment's Guaranteed Growth Bond Issue 48, paying 3.95 per cent fixed for 12 months, suggests Mr Pearson. For the regular £1,000 monthly savings, ING is paying a competitive 3.2 per cent.

Property

Aiming for a 20 per cent deposit may cause problems in the current climate, where many lenders are demanding chunky deposits for the best rates. "They may want to try to save more than this before jumping on to the ladder," says Dennis Hall from IFA Yellowtail Financial Planning.

If they opt for the security of a fixed-rate, they would be able to get a two-year, 4.99 per cent fix at 80 per cent loan to value (LTV), with a £1,094 fee. "This is competitive, but it would make sense to save for a larger deposit and reach the 25 per cent mark for a wider range of products and rates," says David Hollingworth at broker London & Country. "The market may have freed up a little by the time they come to purchase, and hopefully higher LTV products will be easier to come by."

Joseph Clark from IFA No Monkey Business adds: "They should maintain an emergency fund of at least £5,000 in cash to cover unexpected expenses or the possibility of one of them losing employment."

Plus, stamp duty on a home costing £220,000 is 1 per cent – £2,200. Then there are solicitor's costs, and fees linked to the mortgage. This could easily swipe £3,000 to £5,000 from their savings, warn the advisers.

Any property should be purchased as tenants-in-common; not jointly. "This will enable each party to identify the amount of capital they put towards buying it to protect their stakes should it be sold in the future," says Mr Pearson. He advises the couple to make two budgets, one for their current situation and one based on their costs once they have bought the house.

Retirement

Caroline needs to focus on sorting out her pensions as soon as possible. "Many people collect a variety of small pots during their working life, which provide little by means of benefit individually," says Mr Pearson. A review to see how these can be consolidated into a single plan is worthwhile.

Then, Caroline should seriously consider starting to make regular contributions into her firm's pension scheme, says Mr Hall. Most employers contribute to the company scheme, significantly boosting the fund's value.

As a guide, a minimum of 10 per cent of salary needs to be allocated to a pension, say the advisers, to provide any hope of accumulating a worthwhile pension over your working life.

However, Caroline doesn't need to rely solely on pensions to fund retirement. A stocks-and-shares ISA is an effective alternative because it offers a tax-friendly environment for growth and retains the flexibility to call on the capital in extreme emergencies.

"She could also transfer funds into a pension if she becomes a higher-rate tax payer to benefit from tax relief at 40 per cent rather than the basic 20 per cent," says Mr Clark.

Under current legislation, it will be at least 25 years before Caroline can access her pension funds. "With this in mind, she should embrace investment risk for greater possible long-term returns," he adds.

Debt

The interest rate payable on student loans is 0 per cent. "So we would encourage you to pay it off as slowly as possible," says Mr Clark.

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Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF. j.knight@independent.co.uk