Wealth Check: Should buy-to-let be part of this lawyer's brief?
Each week we give 'Independent on Sunday' readers a financial makeover
Sunday 25 July 2004
As a property lawyer, Catherine Morgan has an interest in buy to let. Now she wants to enter the market herself in her home city of Manchester. "I'm not sure whether to buy a flat and move into it while renting out my existing house, or buy two cheaper student homes for letting," she says.
The UK property market may be overheating but she is happier risking her money here than on the stock market. The poor performance of Invesco Perpetual's European Growth individual savings account (ISA), in which she invested a lump sum, has left her wary. "A case of once bitten, twice shy," she says.
Catherine's other financial target is to reduce the £5,000 balance on her credit card, the result of spending on holidays. She has built up this debt since 2002 but hasn't paid any interest on it, as she has switched it between providers offering 0 per cent introductory deals - from Egg to Halifax and from Goldfish to Royal Bank of Scotland (RBS). The 0 per cent offer on her current Mint card runs out early next year.
She has £4,000 saved in NS&I certificates, which earn her 3.65 per cent interest a year.
Catherine paid £150,000 for her Manchester home three years ago. She has a five-year mortgage fixed at 5.5 per cent with Scottish Widows, and a lodger to help cover this.
"I keep thinking I ought to remortgage [her house is now worth £190,000] but I'm not sure if it's a good time," she says. She has life cover via a discounted deal through the Law Society.
As for a pension, Catherine has just started with her third law firm since qualifying and is about to join its defined contribution pension scheme. Her employer will pay up to 4 per cent of her salary into this.
She contributed to a similar scheme at her first law firm but stopped paying in when she left, and her second job didn't offer a pension. She is unsure whether to transfer her existing pension pot to her new scheme.
Catherine pays £15 a month for her Royalties Premier current account from RBS and keeps a second account for bills and mortgage payments.
Interview by Sam Dunn
Catherine Morgan, 32, from Manchester
Job: solicitor specialising in commercial property
Income: between £38,000 and £43,000 a year
Savings: £4,000 in National Savings & Investments (NS&I) certificates
Investments: £6,000 in Invesco Perpetual equity individual savings account (ISA); £1,000 in Powergen and Scottish Power shares
Goal: invest in buy-to-let properties and clear £5,000 debt outstanding on her credit card
Buy-to-let could prove a sound investment but Catherine should tread carefully, says Justin Modray of independent financial adviser (IFA) Bestinvest. "As well as asking whether the market has peaked, she must factor in stamp duty and running costs," he says. "Were she to sell a property other than her main residence, she could face a capital gains tax bill."
One expense can be cut immediately, says Philippa Gee of IFA Torquil Clark: by ditching the RBS account, which costs her just shy of £200 a year for access to a "lifestyle manager".
David Higgins of IFA Glazers warns that Catherine might be "exposing herself to a high level of risk in an overinflated market" by investing in property at this time. And Ms Gee is concerned that she would be putting most of her money into a single asset - bricks and mortar.
If she is determined to go ahead, Ms Gee recommends that Catherine does her research carefully and tries to diversify. "Catherine could consider the purchase of properties in different areas so as not to be exposed to the price movements of just one city," she says.
Mr Higgins suggests setting up a standing order to repay the credit card debt: "If Catherine can afford £210 per month, she could settle this in just under two years - provided she keeps using interest-free offers." But Ms Gee calculates that Catherine can afford to save £500 a month, clearing her debt in just 10 months.
Three years ago, the Invesco Perpetual ISA was at the top of its peer group, says Mr Higgins. Unfortunately, it has suffered in the wake of the technology market crash and changes of fund manager.
Both Ms Gee and Mr Modray say the new manager has improved the fund's prospects but suggest alternatives to spread the risk. Ms Gee proposes a multi-manager fund that invests across a range of funds, while Mr Modray suggests shifting money to an online fund supermarket such as Fidelity's FundsNetwork that lets you buy into different funds inside a single ISA wrapper.
NS&I certificates suit Catherine's risk profile and, as tax-free investments, are probably worth keeping, says Ms Gee. Mr Modray agrees, particularly given Catherine's higher tax rate status. For new savings, a mini cash ISA is recommended. Abbey's postal ISA currently pays 5.1 per cent and promises to stay 0.5 per cent above the Bank of England base rate until next April.
All our IFAs think Catherine should join her company pension scheme. She should also investigate what she would be charged for transferring her existing pension savings into her new fund. If the cost is prohibitive, Mr Modray suggests that "there is no real downside to leaving the pension with the old employer", although Catherine must monitor which funds it is invested in to ensure they are appropriate.
If you would like a financial makeover, write to Melanie Bien at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email firstname.lastname@example.org
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