My mate Callum's money dilemma

How far would you go to save £250 a month? Harvey Jones needs your help to solve his friend's difficult dilemma.

It is good to see that somebody still has some money out there. My mate Callum was lucky enough to sell his two-bedroom terraced house in south-east London just after the credit crunch struck.

His anxious buyer nagged more than £35,000 off the price, but Callum still bagged £400,000.

How anybody could pay such a massive sum a two-bed terrace in Lewisham, and in the teeth of the credit crunch, beats me (even if Callum had converted the loft). It just shows how ridiculous UK property prices are, and why Cliff D'Arcy is right to perform his daily rain dance calling on the Gods to smite them low.

But Callum isn't complaining, and I wasn't complaining either, when he treated me to a curry and a few Kingfishers and asked for a bit of help with his latest money problem.

If you can call it a problem.

Currying favour

After selling up, Callum, his wife and young son decamped from London to Leigh-on-Sea, where they have spent the last 18 months renting a nice house by the estuary, eating winkles and watching the lights flash on the petrochemical plant on Canvey Island.

Leigh-on-Sea is a lot nicer than I expected, and I wasn't surprised when Callum told me he was going to buy a house there, recession or no recession. If I had £250,000 spare equity earning 1% in the bank, I might think about buying a property as well.

I ordered a rogan ghosh and chickpea curry, slurped my lager, and listened to what he had to say.

"We've had an offer accepted on a property!"

"You're crazy. Don't you know that house prices will fall again!"

"I don't care. Well, I do care, but it's a nice place and anyway, my rent is £1,500 a month."

"Has it got a sea view?"

"No, but we can still see the lights on the petrochemical plant."

"Do you pay extra for that?"

"Probably. The house is costing us £475,000."

I choked on my Kingfisher.

Falling off a Cliff

How anybody can pay a massive sum for a 1930s detached house on the Essex estuary in the teeth of a recession beats me (even if it does have two bathrooms and a view of a petrochemical plant). Where is Cliff D'Arcy when you need him?

The £250,000 in Callum's bank account seemed like a lot of money, but he still has to borrow another £225,000.

Still, with a 50%-plus deposit, he won't have any trouble getting a competitive mortgage. Callum is a self-employed web designer, and although the economic upheaval has dented his earnings, he can still make around sixty grand a year. So, unlike many people, his concern isn't whether he could get a mortgage, but what type to get.

Save money or play safe?

"I'm a bit worried," he said, attacking a chapatti. "A lot of the consultancy stuff I do is for the public sector, and their budgets are coming under pressure."

"It will be worse after the next election, whoever wins," I assured him.

"Exactly. My question is, what mortgage do I get? I spoke to a broker, and he said I can get a Woolwich offset tracker currently charging 2.97%, which sounds pretty good to me."

"It is pretty good."

"Mind you, it has a £1,499 application fee."

"That's how things are these days," I said.

"My worry is, I've been reading how interest rates are set to rise, especially with the Government printing all this money. So I asked about a five-year fixed-rate mortgage. I was quoted 4.99% with HSBC, with a £999 fee."

"Bit of a market leader, that one."

"The Woolwich deal will cost me around £1,250 a month over 20 years, while HSBC would cost £1,500 - £250 a month more."

"That's a lot to pay for a bit of extra security. Do you think it's worth it?"

"You're the financial specialist."

"Um, me? Surely it would be better to harness the collective brainpower of the lovemoney.com community. You've heard of the wisdom of crowds? They have it in spades."

"Yes, I hear they're an unusually bright bunch, but I want your thoughts first."

Sixty free curries

So here's my threepenneth. Or rather £38.43, which was the cost of the curry.

"You would have to be very, very anxious to willingly pay an extra £250 a month from day one. I wouldn't.

"Callum, I reckon you've got at least a year before interest rates start to rise, possibly longer. If you go with the Woolwich, you will have saved 12 times £250 by then, or £3,000 in total. Minus the £500 extra application fee, that is still £2,500. In real terms, around 60 curries.

"After that, interest rates will probably shoot up, because the only way the UK can afford to pay off its debts is to inflate its way out of them. But the Bank of England has to lift rates by eight quarter points before Woolwich costs more than HSBC, so you might come out on top for another year.

"Personally, I would take the lower rate today, and offset all your savings to give you a cushion for when rates to start to rise. And keep tarting yourself around for work, because if interest rates rise and your income dries up, I'll be the one buying the curry."

Questions, questions

So was that advice worth £38.43 plus tip (for the waiters, not me)? Or can you lot do better?

Is it wise to buy a house now, with economists talking about a double dip recession? Or is better to sit it out in the rented sector?

With spending cuts on the way, would you rely on consultancy income from the public sector for your mortgage? Is it worth paying more today for security tomorrow?

And would you save money today on a variable rate, and protect yourself against inflation on a fix?

Over to you...