Wealth Check: 'Debts are an obstacle to my business ambitions'

A college administrator wants to find a way to grow his holiday lettings company with his partner, but needs to build up his savings pot first
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The Independent Online

The patient

Andrew Bothamley from Nottingham is keen to clear his debts so he can put money into his partner Darren's new holiday lettings business and also make a career change.

The 32-year-old has worked as finance co-ordinator for a college for the past 10 years, but in the past year, he has started doing some photography and web design work on the side, including setting up a travel website called Your Northumberland Guide.

"I'm doing these additional projects to top up my earnings on a self-employed basis and my monthly income is now around £3,000," he says. "I also helped my partner set up his business, Northumberlandholidays.com, in April 2011."

The couple, who have lived together for 13 years, own two buy-to-let properties in Northumberland, having purchased their second property in April. "The first is a two-bed character terraced cottage built in 1890 which we bought in April 2011 for £120,000," says Andrew. "We took out a two-year fix at 4.99 per cent for the £90,000 mortgage. The second property is a two-bed flat in a historic building of a similar era which we bought for £92,000. The £67,000 mortgage is fixed for two years at 4.99 per cent; both are interest-only deals with The Mortgage Works."

The couple also own a four-bed detached house in Mansfield which they bought for £191,000 in December 2006.

"Last year, we tried to sell this property, which had been our main residence, but as house prices have dipped so much since we bought at the height of the market, we have very little equity left, so decided to let it instead," says Andrew. "There is a £150,000 mortgage, which is now on a buy-to-let deal fixed for two years with the Woolwich at 3.59 per cent, on a repayment basis. We moved into rented accommodation last September, and now live in a two-bed bungalow just outside Nottingham, paying £650 a month in rent."

While Andrew is keen to put money into growing Darren's holiday lettings business, his savings have been pretty much wiped out by the purchase of the second holiday let property and he also has debts to clear.

"Overall, I have around £85,000 invested in our three properties," he says. "Aside from this, I now have just £500 in an individual savings account, and the rate is pretty negligible," he says. "I also owe around £8,000 on a personal loan with the Halifax at 8 per cent over three years, and £4,500 on a credit card with Barclaycard, currently on a balance transfer deal at 0 per cent. Equally, where possible, I try to make purchases through Quidco to cash in on the cashback offered."

Andrew does not have a pension or any protection policies in place.

"We intend to use the purchase and set-up of our holiday lets as a pension when we retire," he says. "Right now, I'd love to be in a position where I'm free enough financially to leave my permanent work at the college and concentrate on my photography and web design. But I just cannot take that risk until I've cleared my debts and built up my savings."

The cure

Our panel of independent financial advisers agree Andrew's desire to clear his debts is the right strategy, as he can then concentrate on building up his savings. However, they urge him to think about long-term savings and pensions so he isn't reliant on his residential property portfolio in the future.

Clear debts

Duncan Clearwater from Clearwater Financial Planning urges Andrew to start with the debt with the highest rate of interest. "Andrew should repay the personal loan as soon as possible – provided he checks for early repayment charges," he says.

Minesh Patel from EA Financial Solutions Ltd adds that Andrew and his partner should do an analysis of income and expenditure. "This will help identify areas where income could be saved and show how much they have available to repay their debt."

He adds: "The rate on the credit card could be very high at the end of the interest-free period, so if the debt is not repaid at this time, Andrew should move the debt to a low life-of-balance card."

Build up savings

Having most of his assets tied up in property, and very little available in cash or other liquid assets is quite a risky strategy, warns Patrick Connolly from AWD Chase de Vere.

"Building up cash savings should be a major priority," he says. "Everybody should have at least some money available in cash to cater for any short-term emergencies. This will avoid the need to take on debt."

This is even more important given Andrew's desire to leave his permanent job, as he may need to rely on cash savings to make up any income shortfall. "Andrew should aim to build up an amount equivalent to between three and six months' of expenditure," says Mr Connolly.

Mr Patel recommends Andrew and his partner maximise savings in cash Isas as the interest is tax-free. Cheshire building society is paying 3.35 per cent on an instant access Isa on a minimum of £1,000.

Review mortgage deals

The rates on the couple's mortgage deals are generally good, although they need to check the rate on the first property they bought in Northumberland as the two-year fix has come to an end, says Mr Patel.

"If their loan-to-value is less than 75 per cent, they could consider remortgaging to a three-year fix with Skipton building society at 4.99 per cent, or a two-year base rate tracker at 4.59 per cent. This should help them lower their mortgage costs."

As the Northumberland properties are holiday lettings, there could be periods where they are not rented, warns Mr Patel. "Andrew and his partner should consider whether they could be let on short-hold, which would allow six-month tenancies," he says.

As the couple's outstanding mortgages amount to £337,000, they need to devise a plan to repay these over time given their reliance on these for pension purposes, says Mr Clearwater.

Diversify investments

While Andrew may view residential property as a secure investment, Mr Connolly warns that having nearly all his money tied up in one type of investment is a risky strategy. "If the residential property market struggles, then all of his investments are likely to struggle as well," he warns. "Andrew should therefore aim to hold other investments."

Start pension saving

Andrew should find out if his employer offers a pension scheme. "If he is not a member, he should join," says Mr Connolly. "As he works at a college, he could find he has access to a final salary pension scheme which could provide him with some excellent benefits."

Protection policies

As none of the couple's borrowings are protected in the event of death, critical illness or disability, Mr Clearwater recommends at the very least, that life cover should be arranged to protect each other. "A joint life policy would pay out on first death," he says. "As Andrew is the main provider of regular income, further life insurance and income protection should also be arranged."

He adds that Andrew and his partner both need to make wills. "This is especially important given that they are not married, as the rules of intestacy do not recognise cohabiting partners," says Mr Clearwater.

Civil partnership

If Andrew and Darren were to enter into a civil partnership, their tax position would be the same as for other married couples, which can have its benefits, according to Mr Connolly. "These include freedom from inheritance tax for assets left by one partner for the other on death," he says.

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