Wealth Check: 'Are two properties a firm foundation for my future?'

By buying a second flat, 31-year-old television producer Melanie Jennings is in a position to generate rental income alongside her regular earnings

The Patient

Melanie Jennings has invested in a second property and is keen to ensure she maximises profit from this. The 31-year-old television producer, on a salary of £37,000, bought a two-bed flat for £169,995 in November last year in Bristol.

"I already own a flat in London, but as I work in Bristol, I decided to release £100,000 equity from this alongside inheritance to buy another flat outright," she says.

Five years ago Melanie got a foot on the first rung of the property ladder when she bought a two-bed flat in Osterley, west London. This cost £265,000 and she reduced the mortgage when she had spare cash. So that now, after releasing equity from this, she pays £325 for a 30-year, £145,000, two-year fixed-rate, interest-only mortgage at 2.69 per cent.

"I thought it was a really good plan to buy another property in Bristol as interest rates are low compared to what they have been, but the value of property in London remains high," she says. "I knew it was a good time to change my mortgage and take more equity out of the London flat. The alternative would be a 90 per cent mortgage on the Bristol flat but this would have meant much higher loan-to-value, and higher repayments."

Instead, with the addition of a deposit, the equity release has enabled her to buy 100 per cent of the Bristol property with no other mortgage.

She adds: "I did shop around for the rate – I had a broker look at different deals for me, and approached other mortgage lenders, but the broker came back with one that suited me perfectly. It means I can keep monthly repayments low for the first two years to get to grips with my new lifestyle, and having two properties."

At present, her sister rents a room in her London property for £500 a month. However, Melanie is looking to rent out the entire flat, which, she says, would supply an income if she was unable to work for several months.

As the second flat is a relatively new investment, and she is heavily invested in the property sector, Melanie wants to know how to safeguard her investment and make the most of it for her future.

"Should I rent out a room in the Bristol flat as well?" she asks. She has no other savings or investments.

Turning to retirement, Melanie was a member of a final-salary pension scheme through her previous employer, but when she took redundancy this was closed off. However, she has joined a money-purchase scheme through her new job, where her employer matches 4 per cent of salary contributions. She paid into the final-salary scheme for four years.

Melanie has no life cover, but says: "I wonder if I need it with two properties worth over £400,000 in total?"

The Cure

At just 31, Melanie already has net worth of around £290,000 and an eye on building security for her future, says Nick Evans, independent financial adviser (IFA) with One Life Wealth Planning. This puts her in a strong position to build on her wealth.

Mortgage

Kusal Ariyawansa, from Appleton Gerrard Private Wealth Management, recommends that Melanie takes advantage of the current low-interest rates to reduce her liabilities as much as possible.

"The advantage of doing so will be in the future, when she will have extra options should she decide to buy a bigger house, or if property prices decrease further," he stresses.

However, the interest-only mortgage will make it more difficult to repay the debt at a later stage, warns Mr Evans, as repayments are not eating into the original loan.

"Clearly she could always sell one of the properties, but with only one room rented out in the London flat at present, more could be done to make the investments work," he adds.

Renting out the London property fully will increase the funds available for investment, or mortgage repayments, if she is not using it herself, and this would be a good option, say the advisers.

However, renting a room in the Bristol flat is a lifestyle choice. While there is an obvious financial benefit with the £4,250 tax-free rent-a-room allowance, which could benefit her if used toward longer-term wealth generation plans, the choice to do so is entirely hers.

Jaskarn Pawar, from IFA Investor Profile, says Melanie should earn £1,000-£1,500 per month in rent from the London flat.

He says: "This would provide her with a reasonable yield. If both the rooms are suitable for single tenants then she could aim for £500 per room per month in rent."

Mr Pawar adds: "However, if at least one of the rooms can hold a double bed and be offered to a couple she could double the rent for that room."

Building savings

Melanie is in a good position to save money from her salary and the rent generated by her London property.

This is important, as safeguarding her investments for the future includes building a cash reserve to fund any repairs or unforeseen events.

"Like any business, if Melanie wants to ensure the smooth running of her properties, she needs to make sure she has some accessible cash if she ever needs it," says Mr Pawar. "It's also sensible to retain a certain level of cash for personal use too."

Mr Evans adds that diversifying her investments is important now she has invested in two properties.

He adds: "We would normally recommend a client holds the equivalent of at least six months' worth of income for emergencies in cash. She could consider cash individual savings accounts (ISAs) initially to keep these funds tax-efficient."

Retirement

With four years' contributions in the final-salary scheme, Melanie will have built up a small pension pot. However, as she is now a member of a money-purchase scheme the return will be based on how well the underlying investments perform. The loss of the final-salary pension is unfortunate, agree the advisers, but the level of contributions Melanie is making now is reasonable – and she should bear in mind that pensions are just one way of providing for her future, says Mr Evans.

If Melanie were starting from scratch today at age 31, a contribution of around £440 per month would be advisable, he says, to retire at age 65.

Mr Pawar recommends that Melanie continues to pay in the minimum she needs to in order to earn the 4 per cent matched contributions.

"What savings she has left over at the moment, and for the foreseeable future should be put aside to build up her cash reserve," he stresses. "Once she feels comfortable with the level of cash she holds, then she could begin investing into a stocks and shares ISA for longer-term gains, alongside her pension."

Protection

While Melanie has a mortgage, life insurance cover only protects others, and if she has no dependents, there may be other forms of protection which could provide more value for her own financial security.

Mr Ariyawansa, from Appleton, says: "Melanie will be entitled to death-in-service benefits from her employer. Secondly, and more importantly, if she is unable to work due to long-term illness or disability, she will only have her properties to rely on for an income."

He recommends that she consider an alternative, such as income protection insurance, to pay her a supplementary, tax-free income should she be unable to work for a period of time.

Do you need a financial makeover? Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF j.knight@independent.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
News
The data shows that the number of “unlawfully” large infant classes has doubled in the last 12 months alone
i100Mike Stuchbery, a teacher in Great Yarmouth, said he received abuse
Arts and Entertainment
The starship in Star Wars: The Force Awakens
filmsThe first glimpse of JJ Abrams' new film has been released online
Sport
Rio Ferdinand returns for QPR
sportRio Ferdinand returns from his three-game suspension today
News
The Speaker of the House will takes his turn as guest editor of the Today programme
arts + ents
News
people

Watch the spoof Thanksgiving segment filmed for Live!
Sport
Billy Twelvetrees will start for England against Australia tomorrow with Owen Farrell dropping to the bench
rugbyEngland need a victory against Australia today
Arts and Entertainment
The cover of The Guest Cat – expect to see it everywhere
books
Sport
Tyson Fury poses outside the Imperial War Museum in south London ahead of his fight against Dereck Chisora
boxingAll British heavyweight clash gets underway on Saturday night
News
i100 Charity collates series of videos that show acts of kindness to animals
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Austen Lloyd: Company Secretary

    Excellent Package: Austen Lloyd: EAST ANGLIA - SENIOR SOLICITOR LEVEL ROLE** -...

    Citifocus Ltd: German Speaking Client Specialist

    £Attractive Package: Citifocus Ltd: Prestigious asset management house seeks a...

    Citifocus Ltd: Performance & Risk Oversight

    £Negotiable: Citifocus Ltd: This is a varied role focusing on the firm's mutua...

    h2 Recruit Ltd: Sales Director - SaaS (SME/Channel) - £140,000 OTE

    £90000 - £140000 per annum + benefits: h2 Recruit Ltd: Are you a high achievin...

    Day In a Page

    Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

    Christmas Appeal

    Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
    Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

    Is it always right to try to prolong life?

    Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

    What does it take for women to get to the top?

    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
    Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

    Knitting pretty: British Christmas Jumpers

    Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
    French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

    French chefs campaign against bullying

    A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
    Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

    Just what you need on a New Year hangover...

    Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
    Cuba set to stage its first US musical in 50 years

    Cuba to stage first US musical in 50 years

    Claire Allfree finds out if the new production of Rent will hit the right note in Havana
    Christmas 2014: 10 best educational toys

    Learn and play: 10 best educational toys

    Of course you want them to have fun, but even better if they can learn at the same time
    Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

    Paul Scholes column

    I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
    Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

    Lewis Moody: Lancaster has made all the right calls – now England must deliver

    So what must the red-rose do differently? They have to take the points on offer 
    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
    Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

    Sol Campbell cries foul at Labour's mansion tax

    The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
    Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

    Sarkozy returns

    The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
    Is the criticism of Ed Miliband a coded form of anti-Semitism?

    Is the criticism of Miliband anti-Semitic?

    Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
    Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

    Ouija boards are the must-have festive gift

    Simon Usborne explores the appeal - and mysteries - of a century-old parlour game