Peter's friend and the search for spare cash

FINANCIAL MAKEOVER

Peter Starie and Jane Creaton, aged 35 and 28, married last September. They are both lecturers at Portsmouth University. Peter lectures on politics and earns pounds 20,000 a year; Jane's subject is criminal justice. She is paid pounds 15,000. The couple have no children.

Neither of them has any savings or investments. They are both members of the Teachers' Superannuation Scheme but will not qualify for the maximum pension. They are paying monthly additional voluntary contributions (AVCs) of pounds 80 and pounds 50 respectively to top up their retirement savings.

Peter bought their home in 1989. The outstanding mortgage is for pounds 47,385, which costs them pounds 423 a month. In addition, Peter still owes a friend pounds 2,000 which he borrowed at the time to help buy the place.

Peter and Jane would like to have more spending money each month and Peter's friend would like his pounds 2,000 back.

What should they do?

Given that their pounds 423 mortgage repayment is by far the largest single item of Peter and Jane's monthly outgoings, this is the obvious place to look for savings.

The pounds 423 includes pounds 33 for buildings insurance, which looks rather a high premium. It may be that they can improve on that - insurance sold by mortgage lenders is not renowned for being the most competitive.

Then there is the mortgage itself. A remortgage would allow them to benefit from one of the discounted deals around.

The property is now worth around pounds 55,000. By remortgaging for 90 per cent of this (pounds 49,500) they could raise a spare pounds 2,000 to repay Peter's friend.

At the same time, keeping the remortgage to 90 per cent would keep down the cost of the mortgage indemnity insurance that the new lender would require. A discounted variable-rate mortgage rather than a fixed-rate mortgage would be better for achieving immediate cost savings.

One deal worth considering is from the Alliance & Leicester: this offers a discount of 3 per cent in year one, 2 per cent in year two and 1 per cent in year three against the Alliance & Leicester's standard variable rate, currently 7.25 per cent. The deal includes a free valuation and pounds 250 towards legal expenses.

If it is arranged as a repayment mortgage, as is Peter's current loan, the monthly repayments would be pounds 263 in the first year. These would rise by about pounds 25 each year as the discount diminishes, assuming interest rates remain at their current level.

The couple could make further savings by switching to a personal equity plan mortgage. The interest element of the new mortgage is pounds 160 and a PEP with a fair chance of repaying the mortgage (but not guaranteed) after 25 years might cost just a further pounds 62, or pounds 222 in total.

The PEP premium assumes investment growth on that money of 9 per cent a year on average.

Going for the PEP and the remortgage would save the couple pounds 168 a month against their present mortgage payments.

Jane wants her money to be invested ethically and to a degree this is possible with a PEP. The NPI Global Care Income PEP is lower than average risk and its investments are ethically screened to avoid companies involved in, among other things, the armaments industry and countries with oppressive governments.

The mortgage savings should be used to fill another financial gap as well as to give the couple more spending money.

They are doing reasonably well on pensions and both also have adequate life insurance through their pension scheme. But should either be unable to work through ill health for a long period then their relatively modest joint earnings would suffer.

An insurance policy that would top up the limited state and employer provision to cover Peter's total income, the bigger of the two, could cost as little pounds 22 a month. With such a policy the benefit would rise in line with inflation, so retaining the spending power of the money, but it would only start paying out after a year out of work.

Peter and Jane were talking to Malcolm Powell of Brachester Green Investments, an independent financial adviser based in Portsmouth.

If you would like to be considered for a financial makeover, write to Steve Lodge, Personal Finance Editor, Independent on Sunday, 1 Canada Square, Canary Wharf, London E14 5DL.

Please include details of your current financial situation and state why you think you need a financial makeover.