Wealth Check: House proud, but the home loan needs paying too
The owner of a Victorian villa wants a new bathroom. Must her savings go down the plughole? asks Harriet Meyer
Sunday 31 August 2008
Choosing the best means of financing £11,000 of building work is proving problematic for Sarah Barnes, 37, from Ware, Hertfordshire.
"Should I be remortgaging or using my savings to pay for this?" asks Sarah, a public relations consultant earning £35,000 a year. "I want to make sure I use my money in the best way."
The work includes putting in a new bathroom suite at her Victorian two-bed house, bought for £173,000 three years ago and valued at around £230,000 earlier this year – although that was before the property slump really took its toll. In fact, the latest figures released by the mortgage lenders Nationwide and Halifax show a drop of around 10 per cent on average in the UK housing market in the past year alone.
Sarah pays £470 a month for a 25-year £111,000 part interest-only and part repayment mortgage, with interest set at 4.99 per cent for two years. The deal is with Alliance & Leicester and lasts until October 2009.
To pay off the interest-only element of her mortgage, she has taken out two endowment policies. She pays £72 a month into a 25-year with-profits endowment with Norwich Union, set to mature in 15 years. However, she has received a warning letter saying that it is unlikely to reach its target of £44,600. She also pays £20 a month into a with-profits endowment with Standard Life. This one is on track to meet its maturity target of £8,900 at around the same time. In addition, she has 205 shares in Standard Life.
For short-term savings, Sarah has £11,850 in an online savings account with First Direct, earning 4.9 per cent. In focusing on saving for home improvements, she has put retirement planning on the back burner. She is not currently contributing to a pension, although she has two policies in place. These are both previous employers' money purchase pension schemes. The first plan, with Standard Life, has four years of contributions and a current value of £16,180.
As for the second, Sarah paid 3 per cent of her salary into this for just five months last year. "I have no paperwork on this, and my employer didn't contribute," she says. "My current employer doesn't have a pension scheme."
In the current murky economic climate – with unemployment widely predicted to rise over the next year – it is understandable that Sarah finds it hard to decide whether to borrow or dig into her savings to fund home improvements.
Our panel of independent financial advisers (IFAs) agree that Sarah would be wise to use some of her savings to finance the building work, rather than look to remortgage. But it is crucial that with current economic uncertainty she replenishes any savings she uses to fund the home improvement projects as quickly as possible.
Kelvin Lillywhite from IFA Albany Financial points out that if she takes out a loan or remortgages, any interest paid is likely to be far greater than that earned on her savings.
"However," adds Stuart Bourne, from IFA Buckles Investment Services, "it is a concern that, by using all her savings, she will be putting herself under unnecessary financial pressure."
As a solution, he suggests a short-term personal loan to fund part of the work. "The rate may be higher than spreading it over the term of her mortgage, but by paying off the debt quicker she may save a lot in interest."
At the same time, Sarah must bear in mind that borrowing rates and additional costs have soared since the start of the credit crunch, and she needs to prepare for a hike in her mortgage repayments when her fixed-rate deal ends next year. Switching to a repayment mortgage at some point is important, to ensure the capital debt is paid off at the end of the term. At the very least she should overpay on her mortgage to cover any shortfall from the endowment policy.
Holding individual shares is a high-risk investment strategy. Sarah should consider selling her stock in Standard Life and using it to kick-start an individual savings account (ISA).
Turning to the endowment policies, there are several options here. She could surrender them to the insurer that issued them or offer them for sale on the open market, which may bring a higher return, but she should seek financial advice before doing this.
"Bonus rates on with-profits funds have fallen significantly recently, and part of the premium goes towards life cover, which isn't essential for Sarah [as she has no dependants]," says James Norton from IFA Evolve Financial Planning.
Mr Lillywhite notes, however, that charges on these plans are higher in the early years; they tend to offer bigger returns, as well as terminal bonuses, later.
It is easy to think of pensions as the only planning tool for retirement. But the goal is simply to have enough money, whether that is in an ISA, pension, or investment portfolio stress the advisers.
Ideally, Sarah should split spare funds between a range of investments. However, if her salary rises and she becomes a higher-rate taxpayer, she will find pensions particularly beneficial.
"These offer excellent tax planning opportunities if you can receive higher-rate tax relief on your contributions, but pay only basic rate on your retirement income," says Mr Norton. "And you can take up to 25 per cent of your fund as a tax-free lump sum at retirement."
Sarah should ask for details of her previous employers' schemes and seek advice on the funds to see if they are suitable for her.
If her company employs more than five people, it is legally required to offer a stakeholder scheme or a personal pension.
"Her employer may be willing to pay into a personal pension of her choice on her behalf if she looks to reduce her salary," says Mr Bourne. "This is called 'salary sacrifice', and she benefits from not paying national insurance or tax on this money."
Customers paying up to £250 more on energy bills than they should every year
Scottish Power hit with sales ban by regulator
10 tips for taking out a personal loan
There are 'dark corners' of the investment and pensions industry, says Pension Minister
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
Durham Free School: 'Creationism taught at' free school facing closure
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
End of the licence fee: BBC to back radical overhaul of how it is funded
Nigel Farage promises Ukip will not 'stigmatise' would-be migrants – and says he wants 'everyone to speak the same language'
Ex-head of MI6: 'We shouldn't kid ourselves that Russia is on a path to democracy'
Most people think legal tax avoidance is just as wrong as illegal tax evasion, poll suggests
iJobs Money & Business
£8 per hour: Recruitment Genius: This Pension Specialist was established early...
£30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads