Wealth Check: 'We need more room for our growing family'
A married police officer with three young children is in need of a bigger home – and that means he's in need of a new savings strategy ...
Sunday 03 February 2013
Police Constable Daniele Lapi is keen to save more so his family can move into a bigger house. At present, the 40-year-old lives in a three-bed property in Bishopbriggs, Glasgow, with his wife, Carol Anne, and their three young children.
The couple bought their home 10 years ago for £96,000, and have a repayment mortgage for £56,000 with Santander. "I took out a tracker and got a good deal which tracks the base rate by 0.75 per cent," says Daniele, who has been a PC for 16 years and earns around £36,600 a year. "We'd like to move into a larger property with four bedrooms for our three growing children," he says. "We'd probably need to spend around £250,000 in the area."
Daniele has some savings, but wants to build on them. "I have around £1,800 with Yorkshire Building Society, £800 with Santander, and £100 with the Halifax," he says. "I also have £450 invested in the Virgin UK Index Tracker – an investment individual savings account (ISA) split evenly between the FTSE and bonds. I set this up five months ago.
"In addition, I've got six small regular savings policies with the Police Mutual totalling £130 a month. These are all at different levels of maturity."
Daniele recognises he has a lot of saving to do, "but I'm very disciplined about paying off my credit cards in full each month," he says. "I'm also savvy with my spending and buy through Quidco when I can, to benefit from cashback."
As a police officer, Daniele gets a good pension through his employer. "I pay in £400 a month which accounts for around 13 per cent of my wage," he says.
He also pays £10 for protection policies through Direct Line, and £30 for a work-protection scheme.
Our panel of independent financial advisers agree it's positive Daniele has built up cash savings and has insurance arrangements, but adds that there's more he could be doing.
Build up savings
Daniele should begin by building his short-term cash savings towards a target of at least three months' net income, according to David Brunning of Bellpenny Financial Planner. "This represents a solid emergency reserve should he have unexpected expenses," he says.
Patrick Connolly from AWD Chase de Vere suggests Daniele gets further into the savings habit and sets up a direct debit from his current account into a savings account. "He should also aim to hold his cash savings within a cash ISA where all interest earned is tax-free," he says. "The current allowance is £5,640."
Mark Osland from Formula Limited recommends that both Daniele and Carol Anne open cash ISAs and save as much as they can into those accounts towards a new property.
"This will get them used to the increased outgoings they will face when they move house and have higher monthly mortgage repayments," he says. "It will also mean they build a considerable savings pot over a fairly short timescale."
While Daniele has made a good start by using some of his stocks-and-shares Isa allowance, his choice of investments should be reviewed, according to Mr Connolly.
"The Virgin UK Index Tracker fund is expensive compared with similar funds," he says. "Daniele also needs to think about what will be gained from such a small investment into bonds. He should look to use more of his allowance – and rethink where he is investing."
Mr Brunning agrees Daniele should focus on his short-term savings. "While his investment Isa could be a platform for building longer-term savings, he would need to leave any money for at least five years, given the volatility associated with any equity-based investment," he adds.
Mr Connolly also points out that the 10-year savings policies investing into the Police Mutual with-profits funds are investments which typically have high charges.
"While they can provide guaranteed returns, the performance is pretty mediocre," he adds. "I would advise against setting up any new policies – but it may be best to keep the existing ones until they reach maturity. The proceeds of these can be used to increase cash savings, invest in stock-and-shares Isas, or to contribute an additional amount to a deposit on the new property."
Plan ahead for property move
With the base rate at a historical low of 0.5 per cent, Daniele is on a manageable mortgage with a very competitive rate, according to Mr Osland. "Daniele could make the most of current low rates by making overpayments," he says. "This would help him pay down his mortgage, and reduce the debt more quickly."
Mr Brunning adds that the ease with which the family can move will depend on the value of their current home – and the amount of equity they have in it. "Estimates from property portal Zoopla suggest Daniele's home is worth around £160,000," he says.
"Given that he has around £104,000 equity in his home, he will need to raise around £146,000 to fund a house costing £250,000 – plus the stamp duty, and legal and moving costs. A lender would need to consider the family's overall income and expenditure to ensure the couple could afford the loan."
Mr Osland adds that while Daniele could ask if the mortgage can be moved, or ported, to a new property, it is likely the top-up will be at a higher rate. He suggests Daniele consider remortgaging to a longer-term, fixed-rate deal. "For example, Yorkshire Building Society is currently offering a five-year fix at just 2.99 per cent," he says. "While the increased cost may be painful initially, it could pay off over the longer term."
Maintain pension saving
Daniele is fortunate to be in the Police Pension Scheme, according to Mr Connolly. "This is top-quality, which, despite some proposed changes, will provide valuable benefits that are government guaranteed," he says. "These would be very expensive to replicate outside of the public service. This scheme will provide the bedrock of Daniele's retirement planning arrangements, and he should continue to pay into it."
Consider extra protection cover
Mr Brunning says that with a larger mortgage, the family will need to look to increase life cover, and potentially also add critical illness cover for Carol Anne.
"While Daniele is confident the benefits offered with his job mean he has sufficient cover in place, he should double-check this," he says. "I would also encourage him to review the family's existing insurance provisions rather than simply topping up existing arrangements."
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