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


The patient


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.

The cure

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.

Property

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.

Retirement

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.

Protection

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

j.knight@independent.co.uk

Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
Arts and Entertainment
booksThe best children's books for this summer
PROMOTED VIDEO
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Sport
Colombia's James Rodriguez celebrates one of his goals during the FIFA World Cup 2014 round of 16 match between Colombia and Uruguay at the Estadio do Maracana in Rio de Janeiro, Brazil
sportColombian World Cup star completes £63m move to Spain
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
News
news
News
i100
News
people
Sport
Antoine Griezmann has started two of France’s four games so far
sport
Life and Style
techYahoo Japan launches service to delete your files and email your relatives when you die
Life and Style
Child's play: letting young people roam outdoors directly contradicts the current climate
lifeHow much independence should children have?
Arts and Entertainment
Tycoons' text: Warren Buffett and Bill Gates both cite John Brookes' 'Business Adventures' as their favourite book
booksFind out why America's richest men are reading John Brookes
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Programme Director - Conduct Risk - London

    £850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

    Business Analyst (Agile, SDLC, software)

    £45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

    Finance Manager - Bank - Leeds - £300/day

    £250 - £300 per day + competitive: Orgtel: Finance Manager - Accountant - Bank...

    Compliance Officer - CF10, CF11, Compliance Oversight, AML, FX

    £100000 - £120000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fi...

    Day In a Page

    Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

    Noel Fielding's 'Luxury Comedy'

    A land of the outright bizarre
    What are the worst 'Word Crimes'?

    What are the worst 'Word Crimes'?

    ‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
    Can Secret Cinema sell 80,000 'Back to the Future' tickets?

    The worst kept secret in cinema

    A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
    Facebook: The new hatched, matched and dispatched

    The new hatched, matched and dispatched

    Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
    Why do we have blood types?

    Are you my type?

    All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
    Honesty box hotels: You decide how much you pay

    Honesty box hotels

    Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
    Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

    The 'scroungers’ fight back

    The welfare claimants battling to alter stereotypes
    Amazing video shows Nasa 'flame extinguishment experiment' in action

    Fireballs in space

    Amazing video shows Nasa's 'flame extinguishment experiment' in action
    A Bible for billionaires

    A Bible for billionaires

    Find out why America's richest men are reading John Brookes
    Paranoid parenting is on the rise - and our children are suffering because of it

    Paranoid parenting is on the rise

    And our children are suffering because of it
    For sale: Island where the Magna Carta was sealed

    Magna Carta Island goes on sale

    Yours for a cool £4m
    Phone hacking scandal special report: The slide into crime at the 'News of the World'

    The hacker's tale: the slide into crime at the 'News of the World'

    Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
    We flinch, but there are degrees of paedophilia

    We flinch, but there are degrees of paedophilia

    Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
    The truth about conspiracy theories is that some require considering

    The truth about conspiracy theories is that some require considering

    For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn
    Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

    Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

    Meet the man who doesn't want to go down in history as the country's last Scottish Secretary