Wealth Check: To get out of the red, he would even sell his home
Desperate times, desperate measures. But is there another way and would the sacrifice be worth it? By Harriet Meyer
Sunday 03 August 2008
Despite the housing market slump, Michael Scott, 35, hopes to sell his seaside home and put some of the proceeds towards paying off debt.
He bought his two-bed period flat two years ago for £205,000 in Brighton's Norfolk Square, where many buildings are listed, and reckons its value has risen to £240,000. "The location is desirable," he says, "so it should still be worth a decent sum. And perhaps it's still possible to sell before prices slip further."
Fortunately, he secured a good mortgage deal before the credit crunch began to bite. He took a two-year tracker at 0.13 percentage points below the Bank of England base rate with Nationwide building society a year ago, giving a current pay rate of 4.87 per cent.
He pays £1,000 a month for a 25-year £205,000 interest-only mortgage, and repayments are eased by rental income from a friend who shares the flat. Because his loan is interest-only, Michael is not paying off any of the capital borrowed.
"If I sell, I will probably be forced to rent for a bit before buying again," says Michael, who earns £46,000 as an account handler for a medical communications firm. "But I've not made a firm decision on this yet."
In the meantime, the priority is wiping out £18,000 worth of debt. He has £5,000 on a Barclaycard and £3,000 on a Capital One card, both on nine-month interest-free balance-transfer deals.
He also pays £300 a month for a £10,000 personal loan with Egg at 7.1 per cent over three years, which was taken out to consolidate other debt.
Michael has not managed to make any short-term savings after ploughing all his spare cash into the flat. "But I want to work on boosting my savings now," he says.
However, he has already made a good start in building up a pension pot, with several plans in place from previous employment. He has two stakeholder plans, one worth £10,000 with Scottish Widows, and another at £28,000 with Friends Provident.
"But I'm not paying into these any more," he says. "I'm really not sure what to do with them, so it would be good to get advice."
He has been in his current job for three months but is yet to join the company pension scheme. "I have to be there a year first, and contributions will be backdated to when I joined." His employer will then pay 5 per cent of his salary into the scheme, regardless of how much he contributes.
Reining in spending and avoiding further debt makes far more financial sense for Michael than selling his home in the current climate, stress our independent financial advisers (IFAs).
"If he does sell and pay off his debts, he's likely to be left with less than £10,000 after costs and will have to rent," warns Alex Pegley at IFA Calculis. "This money may be spent quickly, leaving him back at square one, but without a property."
Although he is currently on competitive deals both on his plastic and his personal loan, Michael must aim to wipe out his credit card debt during the interest-free balance-transfer periods to avoid incurring high interest charges. "The next stage is to cut up his cards," says Mr Pegley.
"While he has this level of debt, his options and ability to build his asset base will be limited," adds Anna Sofat from IFA Addidi.
Trying to sell his home and buy another at a lower price, amid the credit crunch and the current housing market turmoil, is a high-risk strategy. "Michael may be unable to sell, and even if he does, the cost of borrowing has risen substantially," says Ms Sofat.
If he does sell, there is only a small amount of equity in the flat and this will be eroded by costs such as stamp duty and estate agent fees. And he could find it hard securing another mortgage to get back on the ladder, as many lenders are asking for big deposits, sometimes 10 per cent.
"It's not all bad news, though," says Mr Pegley. "Period properties in the right place have probably been least hit by the downturn and are also likely to recover fastest." So riding out the credit crunch and waiting for lenders to ease their criteria is a wiser course of action for Michael.
Another issue is that his mortgage is interest-only so he is not reducing any of the capital debt. "The easiest solution would be to convert it to a repayment loan next year when it comes out of the two-year tracker rate," says Ms Sofat.
But based on current rates he could see a hike in repayments of around £250 a month when his deal ends, even on an interest-only basis, adds Jason Witcombe from IFA Evolve Financial Planning. For this reason, Michael should seek financial advice when the time comes to remortgage.
While Michael benefits from higher-rate tax relief on pension contributions, clearing debt should be his priority before he focuses on retirement planning. "But he should still join the company scheme," says Mr Witcombe. "Otherwise he is in effect refusing a pay rise, as it will make contributions on his behalf."
Michael could consolidate his accrued pension pots by moving them either to his employer's scheme or a private pension. "This will simplify things," says Mr Pegley, "and in a private plan he could pick and choose the funds." He recommends Blackrock's UK Absolute Alpha fund, which aims to achieve positive investment returns whatever the economic climate.
However, putting 5 per cent a year into a pension will not provide a decent retirement income. "At his age he needs to pay in at least 10 per cent of his earnings," says Ms Sofat. If he can't afford this, he should try to increase his payments by 1 per cent each year.
Derek Pain: I'm cautious, but remain one of the few bulls in the market
Donald MacInnes: Who would want to be a Barbie girl in a non-Barbie world?
Mark Dampier: How to get an income now that savings are past the 'use by' date
Thousands of UK investors could lose out following collapse of Secured Energy Bonds
Bargain Hunter: Fly off for a winter break in France or Portugal for well under £100
- 1 Venezuela Expo Tattoo 2015: Extreme body art from 'Vampire Woman' to 109mm earlobes
- 2 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 3 Ball pool for adults opens in London
- 4 Game of Thrones season 5 trailer: The first full-length look is here
- 5 Rashida Jones speaks out against male-centric porn saying 'women should have sex and feel good about it'
9 reasons Greece's experiment with the radical left is doomed to failure
Have we reached 'peak food'? Shortages loom as global production rates slow
Greece elections: Syriza and EU on collision course after election win for left-wing party
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
King Abdullah dead: We can't afford not to hold Saudi Arabia's royals to account
iJobs Money & Business
£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...
£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...
£13000 per annum: Recruitment Genius: This Pension Specialist was established ...
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
Day In a Page
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion