Wealth Check: 'Can we become mortgage free before we start a family?'
The Sweetings may be overly ambitious, our panel of advisers warn, and they should first consider their protection policies and pensions
Saturday 27 April 2013
Daniel Sweeting is keen to get his finances into a more stable position so he and his wife, Laxmi, can commit to having a family without the need for both of them to work.
The 32-year-old is a station manager earning around £37,000, and his 34-year-old wife is a self- employed beautician who earns around £23,000.
The couple live in a two-bedroom semi-detached house in Watford and would love to be "mortgage-free" as soon as they can. They bought this property in April 2011 for £201,000, and borrowed £161,000; they now have £152,000 left to pay.
"We'd love to have cleared our mortgage in four years' time," says Daniel. "We also have plans to refurbish and extend our home to boost the value – and create additional equity."
Daniel and Laxmi have a lifetime Woolwich tracker mortgage with a pay rate of 3.48 per cent.
The Sweetings have around £12,000 in a five-year, fixed-rate individual savings account (Isa) with Newcastle Building Society which pays 5 per cent interest. They also have £12,000 in a current account, and a further £400 squirrelled away with peer-to-peer lender, Zopa. In addition, they have £4,000 in a Morgan Stanley fixed-income equity Isa, as well as £23,000 in an equity Isa, mostly in individual stocks and shares.
Aside from these investments, the Sweetings also own a buy-to-let property.
"We bought a three-bed, mid-terrace property in Hertfordshire for £194,000 in January 2007," says Daniel. "We initially borrowed £179,000 and now have £121,000 outstanding on a mortgage with the Bank of Ireland. We are currently on the standard variable rate of 4.49 per cent."
With this mortgage, £21,000 is on a repayment deal, and the remainder is interest only.
"The rent covers the mortgage with £200 left over each month," says Daniel.
The couple owe £9,000 on a credit card, but this is on a 0 per cent deal; they also spend £1,000 on a second credit card each month, but ensure they pay this off in full.
They owe a further £9,000 on a car-finance deal, but this is in Laxmi's name and is subject to tax relief as she uses this for work.
While Daniel pays around £97 a month into his work pension scheme and gets this contribution matched by his employer, Laxmi does not have a pension.
Daniel also pays £5 a month for a life-insurance policy with Aviva, but is thinking of cancelling it.
Our panel of independent financial advisers agree that Daniel and Laxmi have taken a number of sensible steps to put themselves in a good position. However, they urge them not to forget about longer-term objectives such as planning for retirement. They also recommend they reconsider the level of risk they are taking with their investments, and review their protection policies.
Review protection policies
Danny Cox from Hargreaves Lansdown warns the Sweetings do not have sufficient insurance protection, and could face serious problems should either of them suffer an illness, become unemployed or die.
"Before cancelling the life-insurance policy, they should consider how their mortgages will be repaid if either died," he says.
Patrick Connolly from adviser AWD Chase de Vere adds that Daniel needs to find out what protection benefits his employer offers.
"Many employees get life assurance or income protection," Mr Connolly says. "As Laxmi is self-employed, she should also consider income protection, as she won't get any assistance from an employer."
Minesh Patel from EA Financial Solutions urges both Daniel and Laxmi to get wills drawn up.
Rethink property plans
Mr Cox says the couple's plan to be mortgage-free in four years may be unrealistic.
Mr Patel points out that although they are paying a higher rate of interest on their buy-to-let mortgage, interest payments on this can be offset against rental income for income-tax purposes.
"While the rate is lower on their residential mortgage, the couple would be better off focusing on repaying this first and keeping the debt on the buy-to-let property," he says.
Mr Patel also suggests the couple should remortgage their buy-to-let property to a cheaper deal.
Be mindful of debts
Daniel and Laxmi are taking the right approach with their credit cards to avoid paying any interest, according to Mr Connolly.
"They can also claim tax relief on the car-finance deal, the only other debt they have," he says.
Mr Patel suggests the couple should concentrate on paying off their credit-card debt at the end of the balance-transfer period.
"They should also consider replacing the card they use for general spending with a Tesco ClubCard offering 0 per cent on purchases for 16 months, as they can collect ClubCard points in the process," he says.
The couple could also make use of a site such as Topcashback.co.uk when spending, to make the most of cashback on their purchases.
Make the most of cash ISAs
As the couple have a short-term financial goal, they are being sensible by making use of cash Isas, as all interest earned is tax free.
"They have done particularly well with their Newcastle Isa, as this pays a rate which you couldn't match with products currently available," Mr Connolly says. "But they are holding too large a balance in their current account. They should look to put some of this money into a cash Isa."
Tread carefully with investments
Mr Connolly warns that the Morgan Stanley Isa is risky product, as the return depends on the performance of the stock market.
He is also concerned about the level of risk the couple are taking.
"Investing significant amounts in individual shares isn't the right approach for most people, as the price can fall," he says. "It usually makes more sense to get access to shares through collective investment funds such as unit trusts, OEICs or investment trusts.
Build up pensions
As Daniel is paying 3 per cent of his income into his employer's pension scheme, he has made a good start, according to Mr Cox, especially as his employer also contributes.
"But this is insufficient to provide a good standard of living in retirement considering that neither Daniel nor his wife have other pension savings," he says.
Mr Patel suggests Daniel has the ability to pay in at least 7 per cent of his salary.
"Laxmi should also start some other form of pension saving, such as a stakeholder pension."
Alternatively, Mr Cox suggests Laxmi could consider a low-cost self-invested personal pension which would allow her to invest in funds or shares in the same way as an ISA.
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