We're scared to buy a house

My partner, Peter, is 39, I am 43 and our son is four. At the moment we live rent-free with Peter's family. We are financially illiterate and aren't sure how to sort out our finances. Until September, Peter worked on a freelance basis but now he has a job as a university lecturer, so we have a regular income of £30,000 a year. I work on a casual basis for six hours a week earning £55 a week during term time.

'With our changed financial circumstances, we can now think about buying a house but have absolutely no idea where to start. We are both rather cautious, and the huge number of mortgages on offer is daunting. We'd also like to save money for our son. I have about £75,000 in a savings account, although I am sure we will need that when we buy somewhere.

'We would like a house in Harrow, north London, hopefully close to where we live now, as our son starts school in January and we don't want to look for a new school. We want a small two-bedroom house with a garden but there is very little property like that here.

'We think we can afford £200,000, although why we came to that figure I'm not quite sure. That is not enough to buy what we'd like in the area, so we might have to look a little further afield. I don't think I would like to live in a flat or maisonette but we're having to consider them.

'We shouldn't need to buy any furniture as we have most of the essentials but we are not contributing to household expenses at the moment, except for our phone bill. We do realise that it will be a nasty shock when we enter the "real world", but we haven't sat down and worked out how much the bills will amount to. Neither of us has a private pension but my partner has been automatically put on his university's employee pension scheme.

'We have not had the money to think about saving or buying since we had our son. Now that we have, I'm worried that we'll bury our heads in the sand because we feel confused and wary of most things to do with money.'

Action plan

Welcome to the grown-up world. You know you are in for a shock when you have to stand on your own feet but I wonder if you realise just how expensive living can be. And I do not think you can afford to spend as much on a house as you want.

After Christmas, pretend you have started paying your own household bills. Before you get used to spending Peter's new salary, put aside enough for bills. The savings can double as your new-house fund.

Start researching the mortgage market straight away, because there is a lot to learn. The Financial Services Authority last month added mortgage tables to its website to compare 1,300 home loans.

David Hollingsworth, of Bath-based London and Country Mortgages, advises: 'The key to choosing the right product is to decide exactly what you need from your mortgage and then look for the best fit rather than be suckered in by a load of features that you'll never use.

'Look for clean deals that don't carry any nasties such as extended redemption penalties or compulsory insurance.'

You can borrow 3.5 or even four times Peter's income - a mortgage of ?105,000 to ?120,000. Lenders are unlikely to include your own earnings unless you can demonstrate a track record. You have a wider choice and will pay lower rates if you put down a large deposit and, with your ?75,000, you could buy a house worth ?180,000 to ?195,000. But this sinks all your savings into the house.

James Dalby, head of research at Bates Investment Services, suggests you earmark ?45,000 for the deposit. Borrowing 3.5 times salary means you are looking at a property worth ?150,000. Do not despair. You are in a good position with nowhere to sell, which makes you attractive to sellers. Reckon on at least ?3,500 for the costs of buying, such as stamp duty and legal fees.

Some mortgage schemes include help with fees but usually at the expense of the interest rate so look at the overall package. As first-time buyers, consider a fixed or capped rate scheme. Although the initial monthly cost is higher, you know how much your repayments will be each month.

Decide how long you want your mortgage to run. Be careful to take a deal without extended penalties so that, once the scheme ends, you can switch your mortgage to get the best rate at that time.

You can negotiate a mortgage direct with a lender, get quotes from several, but, if you take advice, make sure the broker is fully independent and check if they charge a fee, which could add another 1 per cent.

Dalby recommends holding back some of your savings: 'I would set aside ?25,000 in a no-notice deposit account. This sounds a lot but the costs of buying and moving can easily take ?5,000. Consider Scottish Widows Instant Transfer account paying a variable rate of 4.05 per cent. If Alison is a non-taxpayer, hold the account in her name only, so you receive interest gross.'

Dalby advocates putting ?2,000 in the Fidelity Wealthbuilder fund for your son, adding around ?50 each month, and putting ?1,500 each into a stakeholder pension scheme, perhaps with Norwich Union.

Peter should also boost his contributions to his employer's pension, which is particularly worthwhile if he can buy any added years. As you are not married, you must make wills to make sure your property goes to each other on death.

Home loan options

Fixed-rate loan: this provides stable budgeting because your as monthly payments stay the same for as long as the rate is fixed.

Capped rate: the monthly payments cannot rise above a certain level but could drop if rates fall sufficiently. Check how much rates need to drop to benefit.

Variable rate (discount or tracker): for the cheapest current rate, though this fluctuates.

Cash incentive: a cash lump sum, around 6 per cent of the mortgage, paid on completion, or smaller cash sums to help with legal costs. Large cashbacks carry a high rate and lock the borrower in for five or six years.

Flexible mortgage: useful if you are sure to overpay on and need payment holidays. Rates are usually higher than those on conventional loans, so you need to use the features to make it worthwhile. If you want only to make some overpayments without penalty, many lenders allow partial overpayments on standard deals.