Money Makeover: A London nurse plans to do voluntary work abroad but also wants to save enough for a deposit on a home. Financial planning consultant Anna Merriott offers her advice on this financial dilemma.

The Profile

Sally Clayton works as a nurse in a hospital A&E department in London. The 29-year-old earns a salary of £29,000 and takes home £2,000 a month after tax. She lives in nurses’ accommodation and pays £426 a month rent, including council tax and all bills.

Sally has no outstanding debts aside from two credit cards that she pays off regularly. She has built up a substantial amount of savings, with £13,500 divided between £8,800 in a Lloyds online account and £4,700 in a Lloyds two-year regular saver account. She also recently opened a new cash ISA with Abbey into which she’s paying £250 a month.

Sally is keen to do voluntary work overseas but is aware that her plans to continue saving for a deposit for a flat means she needs to take a careful look at her finances. "I would like to know how to invest the savings I have in order to get the best return for my money, so that I can both save for a deposit for a property and afford to go travelling," she says.

Expert's advice

Sally is in a fortunate position with no debts and a pot of money saved up, but in order to maximise the interest received on it - and minimise the tax she pays - she needs to shuffle some of her funds around.

She recently closed a fixed-rate bond and last year’s ISA as they were no longer paying a good rate of interest, and put a large chunk of money in her online savings account with Lloyds. However, Anna Merriott, financial planning consultant from Origen Financial Services in London, points out that Sally could have transferred the cash ISA directly to another ISA provider instead of physically moving her money.

"If she had done this, Sally would have improved the interest rate without losing her tax-free status," says Merriott. "In future Sally should contact her savings provider for details of how to transfer ISAs so that she doesn’t lose her tax benefits."

Merriott also recommends that Sally immediately moves £3,600 (minus what she has already contributed this tax year) from her Lloyds online account into the Abbey cash ISA. "This means she will save tax from day one," Merriott says.

With the cash ISA topped up to its limit, Sally can then switch her monthly £250 standing order from the Abbey ISA to the 8% Lloyds regular saver account. As Sally already pays £250 a month into this account, Merriott recommends that she checks with the bank if it’s possible to put more money into such a high-interest account. "Some monthly savings accounts have maximum funding rules, due to the high interest rates," she warns.

However, changing accounts takes time and effort, and it isn’t something Sally should do too frequently as she could lose out on yet more interest during the transfer periods. "It’s also unlikely to make an enormous difference to her short-term savings strategy," Merriott adds.

Given that Sally is likely to want access to her money in a couple of years, Merriott advises sticking to high-interest accounts and cash ISAs so that she can get at her savings easily. Investing in equity ISAs would give Sally the full £7,200 tax-free allowance, but the risk of losing capital in the short term means it’s too risky an option at the moment.

Waterloo sunset

Sally would like to buy a property in central London, within walking distance of Waterloo station. Based on paying £500 a month, Sally’s savings will have doubled to £26,000 in two years’ time - a sizeable amount for a deposit on a flat worth approximately £200,000.

"A few years ago, a 10% deposit would have been more than adequate, but current lending restrictions mean that, in order to get a competitive mortgage rate, some lenders are asking for deposits of up to 20%, or even 25%," says Merriott.

Although Sally’s deposit will not be as high as 20%, it should go some way towards securing a better deal with a lower interest rate. In addition to a deposit, Sally has to factor in extra costs, including 1% stamp duty, solicitor and mortgage fees, and any moving and furnishing costs. She should allow around £3,000 for these extras.

As a nurse Sally is eligible to buy a property through the Key Worker Living Programme. "Options include an ‘equity loan’ to help buy a home on the open market - up to 50% of the total property value - or a New Build HomeBuy option whereby key workers can buy at least 25% of the cost of their home and pay a reduced rent on the remaining share," Merriott explains.

This last option, known as ‘staircasing’, enables key workers to gradually purchase a larger share of their home as and when finances allow, until they eventually own the entire property. However, the cost will be based on the property’s current value, so if it increases in value so does the amount Sally would have to pay to own it outright.

A big downside of the scheme is the limitations owners face when trying to sell their homes - they can only sell to prospective buyers from the local area’s list of key workers. Yet, despite this, it is still an option that is worth considering.

On top of saving for a deposit for a flat, Sally hopes to go on a four-month overseas voluntary project to help with chicken-­rearing in Uganda - in addition to her long-term plans to work abroad.

Overtime necessity

Merriott says working overtime is a tiring option, given nurses’ shift patterns, but it is a way of saving for the extra £3,000 needed for house-buying costs without dipping into the deposit pot.

Merriott strongly recommends that Sally buys a property before going abroad, so that she can rent it out while she is away. "Renting out her property is the only option if Sally takes on aid work for long periods of time in the future," she explains. "Owning a property does not prevent her from moving overseas; if anything, it makes it more of an option as she may make a profit above her mortgage cost each month, and it will allow her to move back to central London even if property prices increase."

If Sally does this, Merriott says she could rent it out - even for a short period. Rental contracts are usually for a minimum of six months, so Sally would need to stay in nurses’ accommodation for a couple of months, but this is likely to cost less than the sum she would receive in rent.

Merriott adds: "The mortgage company might allow Sally to take a ‘payment holiday’, whereby four month’s worth of repayments could be added to the original loan. But she would then pay interest on a higher amount."

However, if Sally takes her trip before buying a home, then the benefit of living in nurses’ accommodation is that she won’t need to find anyone to replace her, and can look for new accommodation on her return.

Sally puts £179 a month into an NHS trust pension. Merriott thinks this is an excellent pension to pay into because the employer contributes around double this on her behalf. "The final benefit is likely to be great deal more than the £179 a month Sally’s paying," says Merriott.

While she saves for a flat, it’s not worth paying into a second private pension scheme, although once Sally has bought a home, Merriott recommends that she looks into making plans for her finances on a long-term basis, including using her whole ISA allowance.

"It was good to discuss things, as it helped me think about my finances more," says Sally. "Now I know I can transfer money between ISAs, I won’t make the same mistake again."

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