Wealth Check: 'I'm still in debt but need to find ways of saving for my wedding'
Jasper Rosenau is considering buy-to-let property investment in London to raise much-needed funds
Sunday 19 February 2012
Jasper Rosenau, 29 years old, is seeking advice on saving for his wedding next year after getting engaged over New Year to his girlfriend in Sydney, Australia.
"We plan to get married next April," he says. "But now I've got to start setting money aside for the cost of this – we estimate this to be between £10,000 and £15,000."
He earns around £35,000 as a social media and digital expert for a communications agency. As yet, he hasn't begun saving for the big day, but wants to draw up a budget to prepare for its cost. "I want to save £500 a month for this myself, and will reduce spending so that I can set this aside," he says.
Concentrating on paying off debt has been Jasper's priority over the past few years. "I was £8,000 in debt," says Jasper, from Dalston, north-east London. "But last year I took out a Virgin credit card with a 16-month interest-free period and began paying this off – I only have £800 left to pay, and will make sure to do so before I'm liable for interest."
Aside from this, he has £4,000 remaining in student loans to repay. "I can't wait to get rid of this," he says, "but I'm not sure if this should be a priority too."
He also uses an American Express Gold credit card for daily expenses to rack up points for air miles. "As my girlfriend is from Australia, this is very useful when going back to visit the family," he says. He pays off the balance every month.
Last May Jasper grabbed the first rung of the property ladder with his fiancée. They pay £900 for a £195,000 30-year joint mortgage on a two-bed converted Victorian flat in Dalston, on a lifetime tracker with the Woolwich, pegged at 2.69 percentage points above the base rate.
However, he adds: "I am considering investing in a buy-to-let property in London for around £300,000, also in Dalston – but is this a good time to enter the property market?"
Jasper is concerned about paying a hefty sum in stamp duty. "What about setting up a limited company to manage the property through? Is this the best way of keeping taxes to a minimum?" he says.
At present he is not paying into a pension. "However, I feel it is an important thing to start thinking about. My company doesn't provide an employee scheme – so would it be best to wait for auto-enrolment or should I start a private pension?"
Tackling debt before dealing with other goals is wise financial planning, agree our panel of independent financial advisers (IFAs).
However, with saving for the big day next on the to-do list, Jasper needs to start budgeting to set aside a chunk of spare cash each month. Meanwhile, buy-to-let may prove a profitable investment but needs more thought – and the sooner he starts saving into a pension, the better.
Saving for the wedding
There are several options for Jasper. He could opt to benefit from tax-free interest paid on a cash individual savings account (ISA), and he can find the top paying accounts on sites such as www.moneyfacts.co.uk. Maximum savings in a cash ISA are £5,340 this tax year, rising to £5,640 for 2012-13.
Alternatively, he may wish to choose a regular savings account, says Aj Somal, from independent financial adviser (IFA) Aurora Financial Planning. However, he has to be committed to paying in a regular sum each month. For example, Cheshire Building Society is paying 5 per cent on its regular savings account, with a minimum investment of £100 a month and a maximum of £500. Jasper may want to opt for this since he has a specific goal and timeframe – and is determined to set aside a monthly sum.
Jasper's mortgage is over a 30-year period, rather than the standard 25 years. "This is saving him around £80 per month in the short term, but will increase the overall amount he pays over the term," warns Danny Cox from IFA Hargreaves Lansdown.
"Of the £900 he is paying per month, around £530 is interest and the remainder is repaying capital – in simple terms, the additional five years is going to cost him an extra £31,860, assuming interest rates remain the same," he adds. "If he can, he should reduce the term."
First-time buyers struggling to get mortgages, alongside a more flexible, mobile workforce is seeing strong rental demand across the UK's major cities, say the advisers.
Bob Hair, from wealth management firm Turcan Connell, says: "With interest rates at an all-time low, there are certainly deals to be had in the highly competitive buy-to-let mortgage market. This could be a sound investment if Jasper takes a long-term view."
However, Mr Cox adds: "He may have difficulty raising the deposit for a buy-to-let mortgage as lenders are wary of letting people release equity from one property to use as a deposit of another." The interest rate is also likely to be higher and lenders typically require 125 per cent rental cover – so the rental income has to amount to at least 125 per cent of the monthly mortgage payments. As Jasper can offset the cost of ownership against rental income – for example, the interest on a buy-to-let mortgage can be offset against the income and repair bills can also be deducted, he should use this strategy.
Jasper has made some wise decisions on reducing his debt. "His debts are all low-cost – and he is right to repay his credit card balance before interest becomes payable," says Mr Cox.
His student loan is automatically repaid at 9 per cent of earnings above £15,000, and since this is low cost – currently at a rate of 1.5 per cent and tracking inflation – it makes sense to leave it as it is until it's wiped out.
At Jasper approaches 30, he should consider pension planning. "With a bleak economic landscape and rising money pressures, this should be a priority," stresses Mr Hair. "People are living longer and enjoying a lengthy retirement as a result, so the earlier you start, the better."
Despite no access to an employer scheme, he may wish to contribute to a low-cost personal pension rather than wait for auto-enrolment. This will be phased in from October this year, and companies with the largest number of employees will be first.
The employee will pay 4 per cent of the salary, the employer 3 per cent, in addition to 1 per cent tax relief from the Government. "If he does wait for auto-enrolment, I would suggest the total contributions amount to 12-15 per cent of salary to make up for lost time," says Mr Hair.
Do you need a financial makeover?
Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF / firstname.lastname@example.org
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