Wealth Check: 'Should I be putting my savings into property?'

A marketing consultant, Tim De Luca-Smith is originally from Worthing, in West Sussex, and wants to return to live on the south coast later this year. "Prices were cheap when we left but now we are struggling to find a property worthy of our time in moving," says Mr De Luca-Smith.

A marketing consultant, Tim De Luca-Smith is originally from Worthing, in West Sussex, and wants to return to live on the south coast later this year. "Prices were cheap when we left but now we are struggling to find a property worthy of our time in moving," says Mr De Luca-Smith.

However, Mr De Luca-Smith and his wife Adriana have built up a substantial savings pot. He wants to know whether he should put this towards the property - they are currently selling for around £220,000 - or whether he should extend his mortgage.

Mr De Luca-Smith and his wife are thinking about starting a family, and they want to know how to best make use of the equity in their existing home, and the savings they have built up, to move up the property ladder.

We put his case to Gillian Cardy at Professional Partnerships, Kevin Tooze at Equal Partners and Matthew Pitcher at Towry Law.

Timothy De Luca-Smith, 28, Marketing Consultant

Education: BA (Hons) degree

Salary: £40,000

Debt: £4,500 Halifax Loan (11 per cent APR). Credit cards paid off monthly

Property: 2-bed terrace in Maidenhead, Berkshire, with £110,000 mortgage fixed for three years at 5.2 per cent

Savings: Savings with wife of £27,000. Currently invested in cash Isas (Halifax). Float of approx £2,000 in Halifax savings account

Pension: Pays £100 a month into private plan

Outgoings: £670 mortgage; £840 other expenses

MORTGAGE

Mr De Luca-Smith wants to know whether it is best to have a lower mortgage, or keep hold of more of his savings when he moves. Ms Cardy recommends that he puts as much of his savings as possible in to the house purchase. To cover a mortgage at 5 per cent, his savings would have to earn 8.3 per cent before tax, which is unrealistic.

Mr Pitcher agrees that it is unlikely that Mr De Luca-Smith could find savings to match his mortgage costs, once tax is taken into account. But he advises keeping a contingency fund of around three months' net salary, currently £7,000 for Mr De Luca-Smith. He should also allow for the possibility that Bank of England base rates - and so mortgage rates - will be higher when his fixed-rate mortgage finishes, and budget for higher repayments.

MOVING HOUSE

Mr De Luca-Smith will have to pay stamp duty at one per cent. He will also need to allow for estate agents' fees to sell his existing home, legal fees and removals. Mr Tooze recommends setting aside a budget for this as it will have a direct bearing on the amount Mr De Luca-Smith needs to borrow, and how much he will be able to keep aside in savings.

DEBTS

Mr De Luca-Smith is relatively free of debt, but his personal loan, at 11 per cent interest, is expensive. Mr Pitcher suggests paying this off; it could be added to the mortgage, says Ms Cardy.

He should check whether the loan has penalties for early repayment. It could be worth repaying the loan, but Mr De Luca-Smith should work out the savings and then offset the penalties against them.

SAVINGS

Although Mr De Luca-Smith is likely to run down his savings when he moves, he should still ensure he uses his cash Isa allowance, and shop around for the best interest rates. Although the rate he earns at the Halifax is reasonably competitive, there are better deals out there, says Ms Cardy. But the highest rate, such as a five-year bond with Portman Building Society (5.5 per cent) or a 45-day notice account with Lambeth Building Society, at 5.15 per cent, do mean tying up the money for longer.

PENSION

Pension arrangements are the only real weak point in Mr De Luca-Smith's financial planning. Mr Tooze points out that his current contributions will not be enough to support his retirement, so he should increase them. But he should first check that the cost structure of his plan is in keeping with current Stakeholder schemes.

Ms Cardy agrees that Mr De Luca-Smith needs to increase contributions, and says he and his wife should make sure they have separate pension funds as this will be more tax-efficient in retirement. Mr Pitcher says that as the earlier pension contributions are the most cost-effective in the long run, due to compound interest, increasing pension payments now is the most effective way to save.

PLANNING A FAMILY

Ms Cardy says that the priority is for the couple to build up a reserve to cover any reduction in income during maternity leave. Alternatively they should plan how they could cut back on spending. Child-care costs should be included.

Mr Pitcher and Mr Tooze say the couple should check their life insurance cover, as well as looking into critical-illness cover.

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