Wealth Check: 'How can I move my growing family out of our one-bed flat?'
The panel of advisers are split on whether a charity worker should sell her first home
Saturday 13 April 2013
Helen Clegg, 35, from Brighton, East Sussex, wants to move up to the second rung of the property ladder and buy a family home.
However, the wannabe "second stepper", who earns about £31,000 a year as a communications manager for a charity but will be going on maternity leave in September, feels "well and truly stuck".
"I would like to raise a deposit on a larger family home, but the equity in my current property would be almost wiped out after fees if I were to sell it now," she says. "I feel it would be a shame to have invested in the flat I own, only to sell for a massive loss – but my hand is being increasingly forced by my growing family, and my mortgage lender's tolerance."
She rents out her one-bed flat in Brighton for £675 a month, after buying it in October 2007 for £140,000. She pays £623 a month for her current 25-year repayment mortgage, which stands at £113,729 and is fixed for two years with Bank of Ireland at 4.26 per cent.
"The flat is only worth around £130,000 today as property prices have fallen, then stagnated, and it's steadily depreciating in value as the lease has dropped to 69 years," she says. "It would be worth over £140,000 with the lease extension, but that will cost around £11,000 to get done," she says.
"However, the mortgage lender has agreed to allow me to rent it out on a temporary basis to friends, as I needed to move to a two-bed property. This arrangement ends in July, when I either need to sell, or move to a buy-to-let mortgage."
This has left Helen in a financial quandary. She says: "If I were to hold on for five years, when my partner would also be in a position to contribute to a mortgage deposit, I could both extend the lease and maybe have a significant amount of equity in the property."
The couple also pay £1,100 a month in rent for their current home, where they live with their 13-month-old son.
Helen has £2,740 on a NatWest credit card, interest-free until September 2013. "All being well, I should clear this before my maternity leave starts," she adds.
At that point her salary will drop to statutory maternity pay. "Then when I return from leave almost my entire salary will be earmarked for childcare for a six-month period, until my first child reaches three and qualifies for 15 hours free childcare per week," she says.
For long-term planning she has been paying 5 per cent of her salary into a pension since January last year, while her employer contributes a further 6 per cent. She has no protection policies in place.
Helen typifies the plight of many second steppers, our panel of independent financial advisers (IFAs) says, as they struggle to move up the property ladder following price stagnation and tougher mortgage criteria since the financial crisis.
Kusal Ariyawansa at IFA Appleton Gerrard says: "I empathise with Helen. The pain in deciding whether to sell your first major investment knowing that you've made a loss, or to run it at a potential loss in the hope that it might regain its lost value, is like being caught between a rock and a hard place."
They agree that while she has some sums to do to decide on her best route, she has a good grasp of the issues she faces.
Sell or keep the flat?
The advisers were divided on this. Mr Ariyawansa reckons it would be unwise to sell just yet as the rent meets her liabilities. "But she should be aware of the risks: void periods; interest rate hikes, and negative equity. If these can be managed financially, and tolerated on the personal level, she should keep her flat," he says.
Scott Gallacher at IFA Rowley Turton disagrees. He says: "Ignoring any redemption penalties, holding on to the flat is not a viable option as Helen would not be able to arrange a replacement buy-to-let mortgage without committing additional capital, which she does not have at the moment." He recommends she sell the flat as soon as possible.
Given that Helen has nothing to fall back on in terms of savings, David Hollingworth at the broker London & Country agrees that this might be the best option. He says: "If Helen is going to let the property longer term she is extremely reliant on the property being let at all times just to cover the mortgage payments."
However, while Helen's existing lender has put a time limit on its current consent to let, it is worthwhile seeing if there might be a way to extend that period, he adds.
"July will come round quickly, and even if she elects to sell she might need some leeway to reach the point of completing on any sale."
Switching to buy-to-let
Even if the lender is not happy to give consent for the letting to continue on the current terms it is worth seeing if it will allow her to keep the current mortgage balance, even if it loads the interest rate and/or charges a fee to switch to buy-to-let.
Mr Hollingworth says: "That would at least give an option without having to find capital that she doesn't have to reduce the mortgage balance."
Buy-to-let mortgages typically require at least a 25 per cent deposit, which on Helen's valuation would mean finding more than £16,000. Mr Hollingworth says: "There are a few lenders now that have extended their reach to 80 per cent and even a handful of deals up to 85 per cent of the property value, but even then the mortgage balance would need to be cut by more than £3,200."
With a young family to consider, a particular concern is the lack of protection in place to provide an income in the event of illness or disability. As a priority, any employee benefits should be checked, including death-in-service benefit.
For Helen, a basic income protection policy that pays around £1,800 tax-free per month will cost about £27 per month, says Mr Ariyawansa.
While Helen has sensibly mapped out her medium-term financial options, a significant issue is the lack of savings to meet unforeseen difficulties, Mr Ariyawansa says.
When possible, she should set aside 10 per cent of salary each month in a cash individual savings account (ISA) that will act as an emergency fund. The allowance is £5,760 for this tax year.
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