TO most students, investing in property means buying a tent to take to festivals, but Jonathan O’Neill knew what he was doing when he bought his first home.
In 2002, while studying planning and residential development at Nottingham Trent University, he used his knowledge of the housing market to gain an early foothold on the ladder. His parents provided a £15,000 deposit and agreed to be mortgage guarantors.
“It seemed to be the right time to buy,” the 24-year-old says. “Property prices were going up and I wanted to get in there. It would have been harder if I had left it until after I graduated.”
Jonathan, who is now a land appraisal surveyor, paid £110,000 for a mid-terrace house with two bedrooms near the centre of Nottingham. A student friend moved in for a year and the rent that he paid helped Jonathan to cover the monthly cost of his £95,000 mortgage.
He started with a two-year, fixed-rate loan from Halifax at 3.99 per cent, but when the deal came to an end in July he switched to an interest-only mortgage with NatWest at 5.19 per cent. He also increased the loan by £3,000 to pay off his overdraft and credit card debts.
His girlfriend now lives with him and they share the monthly cost of the mortgage. “It is still not much more than I would have been paying in rent on student accommodation,” he says.
It may be unusual to take on the responsibility of owning a home at such a young age, but Jonathan is motivated by the long-term returns that his investment will bring.
“A house down the road recently sold for £133,000, so I have probably already made some gains, but there is no point in selling yet because the value will continue to increase.” It is also his first step on the path to setting up as a property developer, a goal that he plans to achieve by the age of 30.
However, before he can realise his ambition to become a property mogul, Jonathan needs to pay off his debts and build some savings. “The only thing stopping me from going ahead with the business is that my finances are not in order.” He is determined to clear his student loans first, which he has already reduced from £13,000 to £12,000.
He is finding it difficult to save, despite his frugal approach to everyday spending. “My outgoings are modest. I cut up my credit cards after I paid them off and I don’t plan to replace them. I have a company car, so no expensive fuel or repair bills, and I do not spend excessively on clothes or going out. Really, there is no excuse for me not to save more.”
He has amassed only £800 in savings since he graduated, which he keeps in a NatWest internet account that pays
4.07 per cent. Much of this will be used to fund a trip to New York that he has planned. “I’m not going to spend lots, but I want to have a good time while I’m there and maybe do a bit of shopping.”
He thinks he can afford to put away up to £150 a month from his £19,000 salary, but he really wants to make sure that the money goes where it can earn the highest returns.
Jonathan is prepared to take risks to make his cash work harder and he likes the idea of investing in stocks and shares. “Buying a house while I was still a student was a big risk, but it paid off. I would certainly be prepared to take more risks while I am young if it means earning more later.”
However, despite his enthusiasm for planning for the future, he is not yet paying into a pension plan.
He is thinking about joining the scheme offered by his employer: if he puts in 2 per cent of his salary, his employer will contribute 6 per cent. But he is being cautious and wants to do his research first. “I want to be sure that this is the best plan around before I commit myself,” he says.
What the experts say
MONEY MANAGEMENT
Mark Dampier, head of research, Hargreaves Lansdown
“Despite his good start, Jonathan is carrying a lot of debt. The mortgage is about five times his salary and on top of that he has other debts too. If interest rates start to rise, he could run into problems. He is probably too young to remember the last housing recession in the early 1990s, which hit first-time buyers particularly hard.
“Jonathan is right to want to clear his debts, but instead of repaying his debts with the Student Loans Company, which charges a non-commercial interest rate that is linked to inflation, he could save in a cash mini-Isa (Halifax’s Isa Saver Direct pays 5 per cent) and then pay off the loans in one go when he has saved enough.
“He should also focus on repaying more of his mortgage. At 5.19 per cent this is more expensive than his student loan and should therefore be the priority.
“His company pension scheme appears to be a good deal and he should join. If an employer contributes to a pension plan on your behalf, then not joining the scheme is like saying no to a pay rise.
“The scheme is likely to be a money purchase type, which means that the eventual pension income will depend on how well the underlying investment funds have performed over the years.
“Jonathan should investigate the fund links available to him and do some research. At his age, time is on his side and he can afford to go for more aggressive funds. Starting a pension would also be a good way for him to learn about the stock market.
“If Jonathan feels he could be saving more, he should keep a detailed record of his spending for a month and then see where cutbacks could be made.”
MORTGAGES
Simon Dexter, consultant, Savills Private Finance
“Jonathan’s first mortgage deal at 3.99 per cent was excellent and the latest rate of 5.19 per cent is not bad either. However, he may want to consider remortgaging again to benefit from an even better rate.
“Halifax is offering a two-year, fixed-rate deal at 4.29 per cent, with free legal fees and a free basic valuation. There is a £599 arrangement fee which can be added to the loan.
This could save Jonathan about £1,165 over the next two years, which could help him to save towards starting his business venture.
“Remortgaging is only worth considering if there are no significant early repayment penalties on his existing deal. When his income has increased sufficiently, he will be able to release his parents from their responsibility as mortgage guarantors.”
SELF-EMPLOYMENT
John Davis, small business marketing director, Barclays
“To start up in business, Jonathan needs to draw up a business plan to demonstrate to potential backers that his idea is a sound investment. This will show that he has researched the market.
“It should include a sales forecast, projected profit and loss and a break-even forecast for the next 12 months. He needs to understand where the demand is, what locations are hot and who his competitors are and what they do well.
“Cashflow is the key consideration for property developers and can make the difference between success or failure. Jonathan must be able to manage his cash, whether he is paying plumbers or kitchen suppliers. This will foster better working relationships and better terms of credit, and it can help you to deliver on time. In property development, meeting deadlines can also mean staying within your budget.
“There are also legal issues to address such as health and safety regulations, including site security. If you employ more than five people you must have a written health and safety policy.”
TAX
John Whiting, chairman of the Tax Policy Sub-Committee, Chartered Institute of Taxation
“If Jonathan sells his house, there will probably be no capital gains tax to pay because it is his main residence. Buying, developing and selling houses is likely to be classed as trading and therefore subject to income tax. If Jonathan becomes self-employed, he must register with Revenue & Customs for national insurance (NIC) purposes within three months otherwise a £100 penalty can apply.
“He will be responsible for his own tax affairs, which means keeping accounts and working out profit and loss, less deductible expenses.
This involves completing a self-assessment tax return and paying Class 2 NICs (£2.10 a week in this tax year) and Class 4 NICs (based on profits of more than £4,895 in this tax year).”
Jonathan’s response
“I will join my employer’s pension scheme without delay; it is a good deal and I probably should have acted sooner.
“Saving in a cash mini-Isa is a very good idea. I know my mortgage rate is comparatively high, but it was the best guarantor mortgage on offer at the time. Remortgaging now would not be sensible because I would have to pay a penalty, but when my deal expires I will consider changing to a capital repayment mortgage instead of an interest-only deal.
“I’m keeping hold of the advice about tax and self-employment. Although my job has given me some understanding of how to run a business, the advice has made me realise that I will have to be very diligent when it comes to cashflow, sales forecasting and projecting profit and loss.”
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