Wealth Check: How to swap one home loan for two love nests
Sunday 30 April 2006
The problem: A joint mortgage has to be untangled
Sarah Smith from Nottingham is in the fortunate position of having a foot on the first rung of the property ladder. She owns a home jointly with her brother, James, but now wants to extricate herself and buy a new place with her boyfriend, Tim.
When the siblings bought their current home for £108,000 in September 2004, they each put up a £5,000 deposit. They then took out a joint mortgage for £98,000 - a three-year fixed rate deal with the Woolwich at 4.15 per cent.
As James is getting married this year, Sarah wants to transfer her share of the property and the mortgage repayments to Tara, James's wife-to-be.
"We've not had the property valued officially but we estimate it's now worth around £120,000," she says. "I want to take my half of the increase in value [since September 2004] - around £6,000 - plus the £5,000 I paid as a deposit."
Working as a primary school teacher, Sarah earns £19,000 a year. She pays £60 a month into the teachers' pension, which is a final salary scheme. At present she has little in the way of shorter-term savings (other than £300 in premium bonds) but is looking to change this.
"Last month, I set up a savings account with ING Direct - paying 4.5 per cent - and I'm hoping to pay £25 a month into this account."
She also wants to pay off her debts. "I owe £800 on a graduate loan from Barclays," she says, "but I'll finish paying this off this year."
She has no protection policies in place.
The cure: Keep the same lender but get a new loan
Sarah and her brother should have no problem in moving - or "porting" - the fixed-rate deal to James and his wife-to-be, according to Drew Wotherspoon from independent financial adviser (IFA) John Charcol.
"The lender would perform an internal remortgage, so there would be forms to fill out and costs to be met in arranging the new set-up, but these would be fairly small."
However, Ben Yearsley from IFA Hargreaves Lansdown warns that while it is "relatively straightforward" to take Sarah off the mortgage, the lender will want to be certain that, in replacing her, Tara has sufficient income to pay her own share of the mortgage.
Sarah should also get the house valued professionally, so that she doesn't miss out on any growth.
"It is then a case of agreeing an amount with her brother, and deciding how he is going to pay her." If James does not have the cash to hand, he may have to take out a loan or increase the mortgage to pay her off. "It would be best to do this at the same time as changing the mortgage deeds," says Mr Yearsley.
Aside from the property, Mr Yearsley says Sarah needs to consider her long-term financial wellbeing in terms of savings and protection products.
Mike Pendergast from IFA Zen Financial Services points out that if James and Tara decide to increase the mortgage to pay off Sarah, the new loan will need to include the existing £98,000, plus the £11,000 she is owed - totalling £109,000. If the property is valued at £120,000, they will be borrowing just over 90 per cent loan to value.
This means that the couple could have to pay a higher lending charge (imposed by some lenders to protect themselves in case borrowers can't meet their repayments). But Mr Wotherspoon notes that James's existing lender, the Woolwich, is one of the few not to impose this.
"Sarah could then receive her £11,000 from the new mortgage, leaving her brother and Tara with joint ownership of the property," adds Mr Pendergast.
As Sarah is looking to buy a new property in the near future, she should not invest her equity from her former home (£11,000) in anything risky, says Mr Yearsley. "It will only be a short-term investment so she could put it in her ING account."
Mr Wotherspoon adds that Sarah should build up an emergency cash fund. "It is always sensible to have at least three months complete expenditure in an instant access account for emergencies."
The best place to save this rainy-day money is in a tax-free mini cash individual savings account (ISA), says Mr Yearsley.
In any case, he stresses that Sarah should try to increase the amount she currently saves regularly - to cover the cost of holidays, for example. "This cash fund does need to be built up substantially - by paying in more than £25 a month."
Mr Yearsley says that Sarah needn't worry just yet about long-term savings plans, such as equity-linked ISAs. She has other priorities to consider first.
"But in due course, as her salary increases, a stocks and shares ISA should definitely be considered."
Sarah needs to check the amount she is paying into the teachers' pension scheme, as £60 per month seems rather low, says Mr Pendergast. "On an income of £19,000 she should be paying 6 per cent - which equates to nearer £95 per month."
Mr Yearsley urges Sarah to check what protection is provided by her employer, such as income protection, if she is unable to work. She may then want to consider additional insurance policies.
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