Wealth Check: 'How can I afford to buy out my brother's stake in the mortgage?'
Saturday 10 February 2007
Jane Stevens has worked for Oxford University for 25 years, including nine years in her current job as an accounts clerk. She lives in the city and her mortgage is on target to be repaid at around the time she retires, assuming she works until age 65.
However, Jane's brother owns a stake in her home. He is planning to retire in the near future and would like her to buy him out. He is looking for around £30,000, which would boost his retirement savings and give her full ownership of her home.
The bad news is that Jane's £10,000 savings fall some way short of the target payment and she's not sure how to make up the shortfall. She's also aware that she's not a million miles away from retirement herself. Are her pension arrangements in order, and are there any other areas of her personal finance to which she should be paying attention to ensure a secure future?
We asked three independent financial advisers for their help: Justin Modray, of Bestinvest; Liseanne Mealing, of MDM Associates; and Colin Rothery, of Throgmorton Financial Services.
Jane Stevens, 54, accounts clerk, Oxford
Income: around £28,500 a year before tax.
Monthly spending: £1,900.
Property: 12 years to run on 6 per cent mortgage. Spare room that could be rented out.
Savings: £10,000 in savings and £3,000 Friends Provident endowment policy due to mature at the end of 2007.
Pension: Final-salary Universities Superannuation Scheme.
Liseanne Mealing says the easiest way for Jane to buy out her brother's share of her house would be to add to her mortgage. She currently has £39,000 to repay on her existing mortgage and her home is worth £240,000, so she should be able to secure an additional advance. Borrowing £30,000 on the same terms as her current mortgage would mean an extra monthly cost of £150, which is affordable given Jane's current commitments and income.
Colin Rothery also thinks extending the mortgage is Jane's best bet. She could reduce the amount she needs to borrow if she plans to use her £3,000 Friends Provident endowment plan to pay her brother, and the cost of the mortgage will also come down if she shops around for a cheaper mortgage than her current deal.
Currently, Rothery says, good products are available from Bank of Ireland - 5.44 per cent a year variable; Cheltenham & Gloucester - 5.59 per cent fixed; and Nationwide - 5.64 per cent, tracking the Bank of England base rate.
Reducing the extra mortgage needed by the £3,000 endowment would cut around £30 a month off the cost of these loans.
Rothery also says that because the remortgage would be below £100,000, she should find a product that has no upfront fees - with a free valuation and no booking charges. If Jane's brother is currently named on the property deeds she may need to arrange a "transfer of equity", which would cost around £250.
The only obvious alternative to a remortgage, says Justin Modray, is to start saving hard. He calculates the she has around £250 surplus income each month. If she put all of that into a savings account that earns 6 per cent a year after charges, she'll have accumulated the £30,000 after around eight years. Her maturing endowment will help, of course.
Modray thinks Jane should consider saving into a well-diversified fund such as Midas Balanced Growth within a stocks and shares individual saving account, where returns would be tax-free. This invests across global stock markets, bonds, property and hedge funds.
Jane wisely wants to keep £5,000 in readily accessible savings in case some sort of emergency crops up. Modray believes this is sensible, but he wants her to earn as much interest as possible on the money. Rather than her current building society savings account, she should use cash individual savings accounts - she can invest up to £3,000 each tax year - as interest will then be tax-free. The National Savings Direct ISA currently pays an especially attractive 5.80 per cent a year, the equivalent of 7.25 per cent for a basic-rate taxpayer such as Jane.
Mealing agrees with advice. She points out that Jane says she is risk-averse, so stock market funds are probably not the right option. A compromise option might be a fund such as Old Mutual Prosper 80, which is lower risk but qualifies for the full £7,000 annual ISA allowance.
Jane is fortunate to be a member of a final-salary pension scheme, says Modray. She should ask her employer for a projection of how much her annual pension is likely to be at retirement. The good news is this income is guaranteed - and safe since she is in a public-sector scheme - and her long-standing membership should serve her well.
Mealing calculates that Jane will have accrued 36 years of pension scheme membership by the time she retires. On her current salary figures, that should produce an annual income of £8,000, plus a tax-free cash lump sum on retirement of around £25,000. She will also get a state pension, but needs to check exactly how much with her local Department for Work & Pensions office.
Jane has life insurance in place to repay the mortgage in the event of her death. The advisers suggests she gets some quotes on term assurance, just to see if she can lower her monthly premiums. The cost of such policies vary widely between providers.
For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail firstname.lastname@example.org
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