Wealth Check: Beware of a buy-to-let boom that may be over

A bachelor who enjoys golf wants to know whether he should buy another house as an investment, and how he should save for a pension
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Rahul Bajaj did not see a computer at school. Now 34, he was introduced to hard drives and keyboards when he joined Marconi. "I got into IT by accident," he says. "Marconi came to my school on a careers day and said if I got my A-levels I could work for them. I never thought then that computing would take off the way it has over the past 10 years."

He took a higher national certificate during his years with Marconi, then worked for Psion and two years ago he moved to the telecoms firm, MCI. "I work in infrastructure, looking after networks, making sure they are running well," he says.

His house in Wembley, north London, is worth £130,000 and he has a £65,000 mortgage at 4 per cent with Portman Building Society. He is considering remortgaging to buy another property in north London and let his present home. "I grew up in north London so I know the area, which should help me spot a decent property," he says. "I'd like to buy more properties when I think they're affordable."

Mr Bajaj has a Standard Life endowment now worth £3,900, maturing in 20 years, and £7,000 in Psion shares. "I'm going to hold on to them because they should go up in value," he says. He pays £150 per month into an MCI pension and is also in the state earnings-related pension scheme.

He has been golfing for seven years and spends £100 to £120 a month on his hobby. "I'm not a member of a club," he says. "I usually just go out for a round with friends at the weekend. I like golf because when you're out on the course you can get away from everything. My handicap is about eight. It used to be better but I've not been playing as much recently." He drives to golf courses around north London in his Volvo T40.

Although he enjoys IT, he wants to move jobs. "It's got to the stage where I've done everything I can do here," he says. "Having worked in telecoms and software houses I'd quite like to go into a different industry, perhaps media or marketing."

We put Mr Bajaj's case to Roddy Kohn, managing director of Kohn Cougar Independent Financial Advisors in Bristol, Simon Farrant, product research manager of Towry Law Financial Services in Bracknell, Rebecca Rider, independent financial adviser at Inter-Alliance Group in London and Elliot Nathan, of The MarketPlace in London.

Rahul Bajaj It Manager

Age: 34;

Status: Single;

Occupation: IT manager at MCI

Education: A-levels; Higher National Certificate;

Motoring: Volvo T40;

Debts: £65,000 mortgage with Portman Building Society;

Salary: £31,000;

Savings: Standard Life endowment (current value £3,900, 20 years left);

Pension: MCI pension £150 per month; separate Serps pension;

Investments: £7,000 Psion shares;

Property: House in Wembley worth £130,000;

Outgoings: £1,400 per month;

Car finance: None.

Solution 1: Mortgage

Mr Farrant says Mr Bajaj is paying 4 per cent, which suggests he already has a discounted rate from his lender. He should contact the Portman Building Society to check if there are penalties for transferring the mortgage. If none apply, there are attractive deals available. The West Bromwich Building Society is offering a two-year fixed rate of 3.39 per cent with no tie-in.

Mr Kohn recommends others such as Britannia, fixed for two years at 3.34 per cent, or Leeds & Holbeck, which is offering 4.49 per cent capped for five years.

Ms Rider thinks Mr Bajaj's present mortgage with the Portman Building Society is so low there is little point in remortgaging and he should pay more of his home loan. On this mortgage, he can pay off up to 10 per cent of the total loan each year until 1 July, 2003.

Solution 2: Buy-to-let

Mr Nathan says he would advise caution with buying properties to let. That market in London has boomed to saturation point in certain areas. Many landlords have had to let their property lie empty, or cut their rents.

Mr Farrant says there are pitfalls such as poor tenants, high maintenance costs, taxes and increasing interest rates over the longer term. Although rental incomes are higher than the interest being paid, this type of investment becomes self-funding. If the situation is reversed, it could create a stampede of owners rushing to sell, which could push prices right down and make a property difficult to sell.

Mr Kohn says Mr Bajaj can approach The Business Mortgage Company who will provide a fixed rate three-year loan at 4.65 per cent, where the rental income is 135 per cent of the mortgage payments.

If he borrowed £100,000 against the Wembley property, the interest payments would be £387.50 a month. So rental income would have to be £523.12 per month.

Solution 3: Savings

Mr Nathan says Mr Bajaj should have about two months' salary in an instant savings account in case of emergencies. ING Direct's telephone account pays 4.22 per cent gross and Cahoot's internet-only account pay 4.02 per cent gross.

Ms Rider says Mr Bajaj should consider putting his £7,000 of Psion shares into a self-select Isa wrapper to protect them from future capital gains liabilities.

Unfortunately, the 10 per cent tax credit on equity dividends within Isas is being abolished next year, so he will not get tax relief on income from the shares' dividends.

He could consider switching out of his endowment if he is unhappy with its performance, or wants to access the capital now, but he should bear in mind that there are suggestions Standard Life could demutualise. If it does, he may qualify for a pleasant windfall.

Solution 4: Pension

Mr Nathan says if MCI make contributions to Mr Bajaj's pension plan, especially if they are dependent upon his payments, he should stick with it, and possibly increase his payments.

Since he earns more than £30,000, Mr Bajaj is not able to set up a stakeholder pension beside his company pension, but if he moves jobs he should take advice on arranging one, because the costs are capped, and flexibility is guaranteed.

Ms Rider says Mr Bajaj needs to pay more into his MCI pension if he wants to build a decent fund for retirement. The maximum contribution he can make at present is 17.5 per cent of net relevant earnings, or £5,425 a year. He is putting in a third of this now (£1,800). Next year, the maximum he will be able to put in is 20 per cent, or £6,200 a year. If he wanted to retire on two-thirds of his present income, using today's interest and annuity rates he would need to build up a fund of £861,111 (assuming he retires at 65, and does not take the 25 per cent tax-free lump sum).

Mr Kohn says Mr Bajaj should keep an eye on his past pension schemes particularly in light of increasing company insolvency and the winding up of final-salary schemes. He should also keep checking the Serps plan, again making sure the investment funds chosen are appropriate.

If you would like to be given a financial health check-up, write to: Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@independent.co.uk.

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