Wealth Check: How do I make the most of my mortgage cuts?
A marketing consultant wants to take advantage of rock-bottom interest rates but isn't sure which way to turn. Harriet Meyer has some suggestions
Sunday 24 May 2009
Nadia Kassas, 27, hopes to make savings on her monthly bills after taking out a base rate tracker mortgage and benefiting from a series of dramatic interest rate cuts.
She has seen her monthly repayments sink from £900 since getting hold of the first rung of the property ladder 17 months ago to just £200 today on a deal that gives a current pay rate of 1.49 per cent. It is pegged at 0.99 per cent above base rate.
"The cuts have been great news and I'm relieved I opted for a tracker mortgage with interest rates so incredibly low," says Nadia, a marketing consultant from Altrincham, Cheshire, who is on a salary of around £25,000. "I just don't know the best way to use this extra money wisely."
As she has an interest-only mortgage of £160,000 with Bank of Ireland, she has yet to start chipping away at the balance of her home loan. "And I would like to start cutting down the loan so perhaps I should put my savings towards reducing it by paying off a lump sum," she says.
However, her current mortgage rate ends in September this year, when she fears her repayments will soar and she will be unable to get another 100 per cent loan-to-value deal.
Nadia originally bought her two-bed flat for £162,000 in December 2007. "I haven't had it valued since then, but I've made lots of improvements to the property such as a new bathroom," she says.
At present, she has some short-term savings, with £5,000 in a cash individual savings account (ISA) with Britannia building society, currently paying 0.8 per cent. She also has £1,000 in National Savings & Investments premium bonds.
Fortunately, she has avoided amassing debt during her twenties. "I try to avoid credit cards," she says, but she still has £7,500 in student loans to repay.
For long-term needs, Nadia paid into a Friends Provident money purchase pension scheme through her previous employer for a year. "I don't know how much is in this fund," she says. "And at the moment I would prefer to invest my money into something I could access.
"I believe in saving for a rainy day, but I don't know if I'll ever seriously invest in a pension."
Finally, for protection purposes, she pays £45 a month for £250,000 worth of life cover with Scottish Provident.
Fortune has swung in Nadia's favour as the economic crisis has seen a hefty reduction in her mortgage repayments.
Yet she needs to maintain a disciplined approach to financial planning with the climate remaining uncertain, says our panel of independent financial advisers (IFAs).
"Interest rates are unlikely to remain in the doldrums, and Nadia could get a nasty shock when her mortgage deal comes to an end," says Mike Wellby from Honeybee Financial Planners.
When she comes to the end of her deal in September, there is no chance that Nadia could get another product that will lend her 100 per cent of the value of her property. "Lenders remain reluctant to lend more than 85 per cent of a property's value," says Richard Morea from mortgage broker London & Country.
First, she needs to establish how much equity she holds in the property. Although even with the improvements she has made to her home, it is unlikely that its value will have risen at a time when prices are on a downward spiral.
This makes it likely that the best, and only option, for her is to slip on to Bank of Ireland's standard variable rate (SVR), which currently stands at 2.99 per cent. "Nadia is lucky that this rate is so low, but her repayments will still soar when her deal ends," says Mr Morea.
If she continues with an interest-only mortgage, Nadia's repayments will double to around £400. "And if she switched to a repayment mortgage over a term of 23 years, they would rise to about £800," he adds. "This could change as the SVR is a variable rate."
However, if she can afford the repayment option, it will be sensible to start whittling down the capital debt. But she should ensure this will not overstretch her finances, as it could make repayments unsustainable on her current salary.
In the meantime, Nadia should build up her savings to guard against interest rate rises in the future as the economy recovers. At a later stage this pot can be used to pay a lump sum off her mortgage so she can get better deals, and fixed rates to give her secure monthly repayments.
On the plus side, while Nadia may fear that she is in negative equity, her home is a long-term investment, says Neil Mumford from IFA Milestone Wealth Management. "History shows property prices will start to rise again – although we don't know when this is likely to happen."
Savings and debt
Nadia should squirrel away as much as possible into a cash ISA while she can. Despite rates remaining dismal, any savings will put her in a stronger position and give her wider options once the current crisis eases, says Mr Wellby.
Even so, her Britannia account is paying a particularly pitiful rate. She could consider transferring this fund into an Alliance & Leicester Direct ISA paying 2 per cent. "Once she has set savings aside she can tackle paying down her mortgage and retirement planning," says Mr Mumford.
Student debt repayments are made at 9 per cent of earnings over £15,000 a year, and interest is currently charged at just 1.5 per cent a year. It is pegged at one percentage point above the base rate. "Nadia should continue to erode gradually this extremely cheap debt," says Mr Wellby.
Providing for a pension is not a priority for Nadia. However, it is worthwhile getting a statement from her previous employer so she can file this for future planning. "At some stage, she should consider joining her company pension scheme – particularly if it will make contributions on her behalf," says Mr Mumford.
As she is still in her twenties, Nadia has decades to make sufficient provision for later life. But she should bear in mind that it is the contributions made in early years that have the most impact, as they have greater chance to grow into a hefty pension fund, the advisers warn.
Nadia has no need for life cover as a single person, says Mr Wellby. However, she needs some kind of protection to meet her monthly bills if she were unable to work due to long-term illness or disability, and her lender may require that she has this.
An income protection policy is most suitable for her needs. "Although from the size of her monthly premiums, it seems her policy may include other benefits such as income protection or critical illness cover," says Mr Morea.
She should check what is included in her policy, as well as taking into account any cover through her employer. If she is able to do so, switching to another product that covers just her basic income would be a far cheaper option.
Do you need a financial makeover?
Write to Julian Knight at the Independent on Sunday, 2 Derry Street, London W8 5HF
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Shock poll shows voters believe Ukip is to the left of the Tories
Nigel Farage's approval rating hits record low as popularity suffers in wake of Ukip sex scandal
Ukip candidate jokes about 'shooting peasants' in racist and homophobic rant
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
Germany sees 'visible rise' in support for far-right extremism in response to perceived 'Islamisation' of the West
iJobs Money & Business
£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...
£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...
£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...
£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...
Day In a Page
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
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
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
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens