Money Makeover: "I want to save up towards a deposit for my first home"

Andrew Smith is 25 years old and works in London at Threadneedle Investments. He commutes to work every day from Tunbridge Wells, where he rents a subsidised room in a house owned by his local church.

He enjoys a reduced rent because he worked for the church as a youth worker for three years. His ultimate goal is to return to working for the church by becoming a vicar but, like many young professionals starting out, Andrew is keen to save enough money to buy a home, get married and start a family. He has managed to build up savings, supplemented by a small inheritance from a few years ago.

Andrew's primary objective is to save towards a deposit for his first home but he wants to make sure his existing savings grow faster than inflation – and ideally as fast as house prices. His savings are quite large for someone of his age, and he needs to ensure that he is able to achieve a steady rate of growth in order to maximise the size of his deposit.

Andrew met IFA Edmund Hastie to formulate a plan. Here's what the adviser had to say.

Andrew has a fixed-rate savings bond with Nationwide, which is about to mature with a current value of £20,000. He is likely to need a deposit of around £25,000 for a property and I would not recommend putting all of his savings towards this yet but instead ensure a suitable spread of investment exposure that will hopefully bring about growth across a variety of asset classes over the next two years.

For starters, he should set aside some of the money in a rainy day fund, around £2,000 to £3,000, which will help with any immediate payments needed upon purchase of the property, and ensure he has exposure to different asset classes. I would invest this money in a General Investment Account offered by, say, Nucleus.

This will give Andrew the best of both worlds because his monies are invested in equities and other investments, though if he requires cash urgently, his investments can be sold down to cash and the money wired to him. Andrew has easy access to the money and a portfolio built around his attitude to risk.This will give Andrew growth targeted to exceed inflation.

To ensure his rainy day fund can grow in a tax-efficient way, he must maximise his New Isa (Nisa) allowance every year. All growth within a Nisa (and previous years' Isas) is free from capital gains tax, so Andrew will not have to worry about any gain in excess of £10,900 in one tax year being eroded by tax.

There are a couple of quick fixes Andrew could also make to his existing investment portfolio to make it more tax efficient and help him build up a deposit. For example, he could transfer his shares into a stocks and shares Nisa so that any future growth is never taxed, helping him achieve a more tax-efficient growth strategy.

He could max out his Nisa allowance for the current tax year, which is £15,000 across any combination of cash and stocks and shares as he sees fit. He should also consider an actively managed stocks and shares Nisa, such as that offered by Brewin Dolphin, so that it has a chance to outperform the market, rather than merely tracking it. Such accounts in Brewin's Managed Funds Service have grown between 7% per year over the past three years for the most cautious fund, to more than 20% for the most aggressive fund.

Next, he should review the £13,750 he has in BT shares. I would diversify his shareholding into a balanced fund to prevent a significant loss, should shares in BT fall considerably.

A balanced fund will have a spread of investments in fixed income, bonds, cash and some equities to give the investor exposure to stockmarket growth. Rates of growth in cautious funds over the past few years do vary, though some providers have achieved about 7% per year on average.Two such funds Andrew could consider are Brewin's Balanced and Cautious portfolios, which have returned 24% or 32% over the past three years respectively.

From the Nationwide bond, Andrew could divide the remaining cash so that half goes into a balanced fund to give a reasonable rate of growth over time, and the remainder into a structured product.

As for the property deposit, I think he should put down 10 to 15% of the purchase price, which will result in him paying a lower rate of interest on his mortgage than should he opt for a 95% loan-to-value (LTV) deal many first-time buyers have to go for. Also, in a rising market, it will mean that his LTV will decrease quite quickly. For example, if he buys a flat in Tunbridge Wells for £200,000 with a £170,000 mortgage that would be an 85% LTV– so he would have to pay a deposit of £25,000.

Assuming the property increases in value by 10% to £220,000 two years later, when he comes to remortgage, then the LTV will have decreased. And if he repays £5,000 of the debt over the two years with a repayment mortgage, he would have reduced his mortgage to £165,000, so the LTV would be 75% rather than 85%.This will result in

the rate of interest falling from about 3.25% at 85% LTV to 2.5% at 75% LTV, based on current mortgage rates.

When applying for a mortgage, I would recommend Andrew take out life and critical illness cover (CIC) so he will receive a tax-free lump sum in the event of critical illness, or any beneficiaries will in the event of his death. At his age, a premium of £50 per month will provide a minimum of £150,000 of life and CIC. I would fix the premiums so they are guaranteed throughout the life of the plan, enabling him to take advantage of ‘locking in' low premiums.

Andrew also needs to start planning for his retirement. He should consider setting up a small monthly contribution towards a personal pension, say £100 per month, which will enable him to receive tax relief on his contributions.

If Andrew wants the greatest spread of investments, then I would recommend a self-invested personal pension (Sipp) to give him the greatest choice of funds – usually several thousand from a fund supermarket – and low annual management charge of 0.45%. Hargreaves Lansdown offers a competitive Sipp at present and has a strong financial record as well.

He should invest his pension money in accordance with his attitude to risk within a balanced managed portfolio as a way of beating inflation.

Andrew says: "Edmund's advice transformed my financial situation from one based on some vague ideas and low-yielding deposits into a fully-fledged and professionally managed investment portfolio."

How Andrew can plan for his financial future

  • Set up a rainy day fund of around £2,000 to £3,000.
  • Maximise his New Isa allowance.
  • Aim to put down a house deposit of 15%.
  • Start saving for retirement, possibly into a Sipp.


Original financial report conducted by Edmund Hastie, an independent financial adviser at Totus in London