Wealth Check: How can I make the great leap from a flat to a house?

An Edinburgh technical consultant wants to expand his family within the next three years. That means finding the money for a much bigger home



The patient


Jonathan Eisenberg, 31, a technical consultant from Edinburgh, saved enough last year to put down a £70,000 deposit on a one-bedroom Georgian flat in the city centre.

But with plans to marry his fiancée, a single mother with one daughter, and to have more children in the near future, Mr Eisenberg says he will need to upgrade to have enough space to accommodate everyone.

At present, he shares the two-bedroom flat his fiancée rents and lives in with her daughter. In an ideal world, he would like to move into a three- or four-bedroom detached or semi-detached house in the capital within three years, but expects this will cost in the region of £240,000 to £350,000.

He is earning a salary of £24,000 and has outgoing monthly expenditure of £1,000 plus a £200 monthly mortgage repayment. Because most of his savings are locked up in the mortgage, the financial planners believe he may have to lower his property expectations or extend his timeframe if he wants to move his family into a larger property.

The cure

Upgrading a property

Mike Stafford, a certified financial planner and partner at Hertford-based Stafford & Co, says Mr Eisenberg's dream is understandable but may not be achievable in the time he has specified.

"If Jonathan sold his property now, he could expect to have £70,000 to put towards the new property. His borrowing power is, at a stretch, four times his salary, giving him potentially an extra £96,000. If we allow £10,000 for the expenses of moving, stamp duty and solicitors' fees, his purchasing power is in the region of £156,000," estimates Mr Stafford.

"As his ideal property is £240,000, he will have a shortfall of £84,000. This tells us that short of winning the pools or receiving an inheritance, he is not yet in a position to upscale."

However, Mr Stafford says that Mr Eisenberg does not need to give up on his goal and there are various ways in which he can start to bridge the gap in his finances which would potentially allow him to purchase his dream property further down the line.

Mr Stafford says: "Jonathan has a number of options: he could rent out his property and, at current rental rates in Edinburgh, he should be able to clear £400 per month after paying the mortgage – meaning there would be a possible £14,400 to be added to the kitty after three years."

Other options he could consider include moving to a better-paid job, doing overtime or extra part-time evening work or, if eligible, trying for a larger bonus.

However, Mr Stafford says Mr Eisenberg's decision to let out his flat should not be taken lightly as there are a number of cost and time implications that would go with being a landlord. "Jonathan would need to obtain consent from his lender to rent out the property and this could incur a charge. He would need to inform his home insurer because the presence of a tenant could change the way they view the cost of protecting the property. And, thirdly, he would need to consult an accountant to ensure he doesn't incur capital gains tax on the eventual sale of the property."

Retirement provision

While Mr Eisenberg has some way to go before he retires, Joe Swanson, the joint managing director of Weybridge-based staff benefits consultancy Company Rapport, recommends that he begin saving into a pension now to ensure he is not strapped for cash when he retires later on in life.

"The first consideration for retirement planning is Jonathan's employer. Many companies offer valuable assistance with long-term savings in the form of company-sponsored pension schemes. Some are entirely funded by the employer and some require a corresponding employee contribution. The biggest crime in retirement planning is to reject the employer contribution, either through apathy or, where a personal contribution is required, due to the short-term preference of cash over savings."

If Mr Eisenberg's employer does not offer a pension scheme to staff, there are still other options which will enable him to prepare a retirement provision.

Mr Swanson says: "It would be sensible to split contributions between a pension and at least one other savings vehicle, such as an ISA. The relief from income tax provided by pensions is attractive and the ISA provides increased flexibility.

"If Jonathan invested £100 per month into a pension plan from now until 65, it could provide him with a fund of £130,000 assuming an average growth rate of 7 per cent per annum. He would be entitled to take out 25 per cent of this as a tax-free lump sum and the remaining fund could get him a retirement income of £6,250. Bearing in mind that his income at 65, projected forward by increases in the National Average Earnings Index, could be about £90,000, it puts into context the value of savings he needs to make to be comfortable in retirement."

Covering bases

While Mr Eisenberg is still relatively young, a high level of dependency hinges on his income in helping support his fiancée and her daughter and also paying his existing mortgage. Minaz Kasmani, a certified financial planner at WH Ireland Wealth Management in Cardiff, recommends Mr Eisenberg consider some forms of insurance to ensure he and his loved ones are protected in the case of unexpected events.

"With no savings in place and all the equity tied up in the property, there would be a significant financial strain if Jonathan were to suffer a loss of earnings due to ill health or premature death. He should consider income protection insurance, which would pay out a portion of his earnings if he was unable to carry out his occupation due to ill health. The policy would pay out as many times as needed during the policy term, and the payout would continue until the earlier of Jonathan's recovery, retirement or the policy expiry."

Ms Kasmani suggests that Mr Eisenberg select a benefit which is linked to inflation to maintain its real value over time. "Assuming the policy is set up to Jonathan's retirement age of 65, and pays out a tax-free monthly benefit of £1,396, after a one-month waiting period, this cover would cost £43 per month with Liverpool Victoria. This insurance will enable Jonathan to focus on getting better without worrying about how his financial commitments will be met.

"A provision really should be made for the young family if Jonathan were to be met by untimely death. A family income benefit policy would be a cost-effective solution, paying a tax-free income to the family from the point of Jonathan's death, until the policy expiry date, which could coincide with his daughter attaining majority. Assuming the policy is set up for a 20-year term, with an inflation-linked monthly benefit of £2,000, this would cost £10 per month with Legal & General. This insurance will enable Jonathan's partner to concentrate on looking after their daughter, rather than being forced to work when she is not ready."

Do you need a financial makeover?

Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF

j.knight@independent.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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