Wealth Check: 'Can I afford to follow my dream of opening a gallery?'
Saturday 05 March 2005
Kate Crossley works in marketing but has just handed in her notice to follow her passion for art and set up a gallery.
Kate Crossley works in marketing but has just handed in her notice to follow her passion for art and set up a gallery. Her husband Paul gave up his job to pursue his love of racing bikes; he is working in a bike shop.
Kate and Paul have been thinking about moving to Devon with a view to pursuing Kate's dream. They want to sell their house in Cheltenham and buy in the South Haven area. Property is expensive in this part of Devon, however, so they have looked into the possibility of renting out their current house, which would give them income of £675 to £700 a month.
They would like advice on how to make their finances work better so they can afford the property they need, preferably with gallery space and accommodation.
We put their case to Juliet Schooling at Chelsea Financial Services, Paul Illot at Bates Investment and Daniela Glover at Smith and Williamson.
PAUL, 33, AND KATE CROSSLEY, 38
Salary: Kate £18,000. Paul recently left his job in IT.
Property: £106,000 mortgage outstanding on house valued at £177,500. They are three years into a six-year cash-back scheme with a £5,000 redemption penalty.
Monthly outgoings: Mortgage £640. Bills, food, petrol and other household expenses £1,100.
SAVINGS AND INVESTMENT
Ms Schooling warns that the Crossleys' plans seem ambitious; she is concerned that they have no savings and investments. As it will take time to set up the business, she suggests they first set up an emergency fund of £3,000 in an instant-access account; Alliance & Leicester's Online Saver pays 5.35 per cent. She urges them to examine their bank accounts and credit cards to make sure they are getting the best deal.
Ms Glover stresses that savings must be fundamental to the Crossleys because getting into debt, such as borrowing on credit cards, is to be avoided.
In the long run, Mr Illot says they should set up stakeholder pension policies. Assuming they could afford to do so, the couple could then make contributions of up to £2,808 each tax year net of basic rate tax. Each policy would attract tax relief of up to £792, to make a total pension contribution of £3,600.
Ms Glover says the £5,000 penalty on remortgaging is equivalent to 4.7 per cent of their mortgage, so it would take more than three years to recoup any benefit from paying this. If they can raise enough capital to make the move to Devon, they still need back-up funds for maintenance, or in case the house is without a tenant for short periods.
Ms Schooling says with their current mortgage, rental income from the property of £675 would only leave them with £50 a month. If both leave their jobs it will be extremely difficult for them to rent or buy a property in Devon with no proof of earnings. A self-certified mortgage is generally used in this case, but they are still likely to want some proof of earnings and a deposit of at least 11 per cent. They will need to keep 15 per cent equity in their house in Cheltenham if they change the mortgage to buy-to-let.
Ms Schooling suggests that they could approach their bank to obtain a small business loan or that Paul could find employment in the area, to provide some income while Kate starts up the business, enabling them to take out a mortgage.
Mt Illot says giving up a monthly income is always daunting. Mr and Mrs Crossley might want to limit monthly outgoings until they have a better idea of the level of income the gallery will provide. Setting a budget for the capital they're likely to need to help them get the business off the ground is also a must.
The Crossleys should consider setting up a partnership agreement via a solicitor, to establish the ground rules for the business. Mrs Crossley could make a list of all the financial benefits she'll be giving up by leaving her marketing job. They could then decide to pay insurance firms to provide those benefits they believe are most important to them; some form of life insurance or critical illness cover would also be advisable when they can afford it.
Paying tax on their incomes is something their employers will have done for them automatically in the past. Initially, Mr and Mrs Crossley ought to set aside 15 per cent to 17.5 per cent of their turnover to help them towards their likely self assessment tax bill. As time progresses, they should seek advice as to whether this will still be enough.
Advisers' views are given for information only.
* For a free financial check-up in the Wealth Check column, write to The Independent, 191 Marsh Wall, London E14 9RS, or e-mail firstname.lastname@example.org.
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