Mariatu Allie, 26, from London, is worried about making ends meet after renovating her home. She shares the £400,000 mortgage with her sister and is paying it back on an interest only basis. But to meet the payments, she is renting out some bedrooms. "I worry about what would happen if we lose our tenants or our mortgage payments go up," she says. "We just can't afford many extra costs or losing the rental income."
Three independent advisers offered Mariatu advice this week: Matthew Woodbridge from Chelsea Financial Services, Mel Kenny from Radcliffe & Newlands and Keith Churchouse from Churchouse Financial Planning.
CASE NOTES: Mariatu Allie, 26, TV compliance officer, London
Monthly outgoings: £1,800
Mortgage and rental income
"Luckily Mariatu is in a reliable rental location in London where there will always be a steady demand," says Mel Kenny. "She has plenty of value in her property and can currently meet her mortgage payments, but her situation is a finely balanced tightrope. She has to have good tenants, a contingency plan and be able to pay out the extra if one of the rooms becomes empty."
Matthew Woodbridge agrees that Mariatu is on the edge of a financial precipice. "She has taken on a huge debt relative to her annual earnings with this mortgage," he says. "And with her income so closely matching her outgoings, she has no room to manoeuvre if interest rates increase or she has unexpected expenses."
Although her home may be difficult to part with, the advisers also suggest that if house prices are beginning to fall, and with money very tight, Mariatu may wish to crystallise the capital growth she has achieved through the property and sell up.
Meanwhile, to try to alleviate some of the pressure, Mariatu should make sure she takes advantage of the rent-a-room relief offered by the Government, adds Keith Churchouse. "She could rent her rooms for up to £354 per month with no tax liability. No tax is payable if the rental income doesn't exceed £4,250 a year if the landlord occupies the property." He adds that Mariatu should look at her remortgage options well ahead of the end of her current deal, to make sure she gets the best deal for her circumstances. With interest rates expected to fall further this year, Mariatu's payments may become cheaper, Churchouse says.
Mariatu already has a cash ISA worth £3,200, but Woodbridge believes she should start building another cash savings pot to help protect her against income pitfalls. "Mariatu should start building a cash position worth between three and four months of her salary," he says. "Scarborough's 6.5 per cent regular savings ISA is very impressive, and the new ISA rules mean she can invest up to £3,600 from 6 April."
Kenny agrees and also suggests the best home for Mariatu's savings are an ISA. "The NS&I Direct ISA offers a variable rate of 5.80 per cent tax, or Icesave's Cash Mini ISA currently attracts 6.1 per cent tax free," he says. "Greater returns are possible on the stock market but investing this way should be considered as part of a longer term financial strategy."
"With this mortgage, Mariatu needs to make sure she protects her income in the event of unemployment, illness or an accident that stops her working – such as losing tenants," says Kenny. "Mariatu leaves herself vulnerable without the appropriate safeguards." Churchouse adds that Mariatu should make a will as a matter of priority. "She should encourage her sister to do the same," he adds, "particularly if they want their share of property to go to each other when they die. Without wills, the sisters even risk the property being handed over to the state."
Money may be tight, but every one of our advisers urge Mariatu to start putting money away for her retirement as soon as possible. "The earlier you start a pension the more you have in retirement income," says Woodbridge. "This will become imperative for Mariatu has she aims to retire at 60. Her priority right now needs to be building her cash up, but in the meantime she should see whether her employer offers a company pension, especially if they contribute to it."
To find an independent financial adviser in your area, visit www.unbiased.co.uk
For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail email@example.com