The problem: An £80,000 income, but debts eat it up
Despite combined earnings of nearly £80,000, Peter and Sarah Jones from Plymouth are struggle to make ends meet.
Peter earns £25,000 as a police officer and Sarah £54,000 as deputy director of finance for a local authority, but they admit they're failing to manage their monthly income.
The couple, both 41 and with four children aged five, seven, 10 and 14, owe £2,500 on an M&S credit card at an annual percentage rate (APR) of 15.95, and £1,500 on an HSBC credit card at 13.9. Additionally, Peter still owes £1,900 on student loans.
But their heaviest debt is a personal loan with Tesco, taken out five years ago to put towards a deposit on a buy-to-let property. They still owe £16,000 on this at a cost of £305 per month.
The house, worth £250,000, is being paid for with a £149,000, buy-to-let, interest-only loan from Mortgage Express - the specialist lending arm of Bradford & Bingley - at a fixed rate of 4.99 per cent. It costs £620 a month.
The couple originally bought the house as an investment for their retirement; at present it is let to students and the gross rental income is £15,000 a year. But they now wonder if they'd be better off selling it.
"We could then pay off the personal loan and use any remaining money to pay down some of the mortgage on our family home."
The latter is financed by a £145,000 repayment tracker mortgage with Intelligent Finance (IF). At 4.74 per cent, it costs them £965 a month.
However, this was originally an interest-only loan and the Joneses are keeping a handful of old endowment policies from the Halifax and Standard Life as investments. These are due to mature in 2012.
The couple have also tried to build up savings but often end up dipping into these funds.
Sarah has £1,000 in a mini cash individual savings account (ISA) with IF, paying 4.55 per cent, and Peter has £1,500 in an HSBC Premier Savings account, paying 2.69 per cent. They each pay £250 a month into their accounts.
Peter has been a member of a final salary pension scheme with Devon & Cornwall Police for three years, contributing 11 per cent of his salary. Prior to this, he worked as a BT engineer and contributed for 11 years to a BT plan (now frozen).
Sarah has been a member of the Local Government Pension Scheme (LGPS), also a final salary plan, for around 11 years. She contributes 6 per cent of salary.
Both have life assurance through work as well as extra life cover - Peter to the value of £150,000, and Sarah £350,000.
The cure: Release the money in your second home
Cashflow is the couple's biggest problem, says Christopher Wicks at independent financial adviser (IFA) the Alexander Beard Group. "To cure this, they must cut their borrowing and perhaps simplify their personal finances." He recommends they consider selling the buy-to-let house and using the proceeds to clear their debts and reduce the mortgage.
If the couple sell their student house, says Rebecca Taylor from IFA Dunham Financial Services, they could repay the credit cards and personal loan - freeing up nearly £400 of income a month.
They could then think about clearing some of the mortgage on their main property and cutting their monthly payments.
Darren Baker of IFA Direction Financial Planning urges the couple not to bother putting money by until they have cleared all their debts, as "they'll be paying far more in interest on their loans than they're [earning] on their savings".
But he doesn't think they should rush to sell their buy-to-let. As an alternative, they could extend the life of their Mortgage Express deal, raise £16,000 and pay off the Tesco personal loan.
He also suggests that the couple cash in their HSBC and IF accounts to clear the M&S card debt, and then redirect the £500 they save each month to paying off their HSBC card.
The Joneses will never get anywhere if they keep plundering their savings to meet everyday expenditure, warns Mr Baker.
Ms Taylor suggests the couple set up a long-term savings plan that would penalise them for regular withdrawals. "However, they may need to split savings into an emergency fund that they can access, and another account for the future."
The Standard Life and Halifax endowments will all probably fall short of projections, warns Ms Taylor, and may not be worth holding on to. "Today, there are more tax-efficient investments available, greater fund choice and lower overall charges. They can do better with their money elsewhere."
As with all endowment policies, it's worth checking with an IFA whether it is in their best interest to surrender them.
While property can be a good investment, adds Ms Taylor, the couple could look at alternatives that don't lock up their cash for so long, such as unit trust funds.
"They can use their £7,000 stocks and shares ISA allowance for this," she says. "A fund like F&C Multimanager Balanced provides great diversification."
While the tracker deal on their main home is very competitive, the couple could consider a fixed rate for the short term instead, until their budget is under control. "If rates rise," says Ms Taylor, "this will give them a little more leeway in their outgoings."
If they hold on to their buy-to-let, they must ensure they have been offsetting the interest on this loan against the rental income for tax purposes, says Mr Baker.
Sarah and Peter have decent final salary schemes, says Ms Taylor, but it's worth checking projected retirement income and whether to make additional contributions.
To complement their life insurance, the couple should consider income protection or critical illness cover, says Mr Baker. However, they should check their employer benefits first.
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