Many twenty somethings would be envious of Sara Turner's lifestyle.The
25-year-old has owned a two bedroom house since 2005, has a devoted
boyfriend and recently landed her dream job in travel journalism after an
“amazing” year touring India.
Moreover, for the time being she is living rent-free with her father to cut
costs. All these advantages do not, however, add up to a worry-free
existence. Sara's property is in Swansea, 200 miles from her father's home
in Eastbourne, and she has had to put up with a string of bad tenants.
“I had to spend £1,000 getting the house into shape after one of them left,”
she says. “The walls had been repainted an awful brown and a used nappy had
been left in a cupboard.”
Sara bought the house three years ago for £91,000 - beating an asking price of
£93,000 - and lived there through her final year at Swansea University,
using rent from two flatmates to cover repayments on the mortgage. The
property is now worth about £108,000, but Sara is concerned that this could
fall in the slowing housing market.
Since October Sara has been on a two-year fixed-rate mortgage with Bristol &
West. The rate is 5.99 per cent, giving repayments of £560 a month. Her
brother, Peter, is joint mortgage holder, paying 10 per cent.
Rent from tenants brings in £460 a month and Sara adds: “I want to have some
basic work done to convert it to a three-bedroom house. That would cost
about £3,000 and would raise the rental value, but I'm not sure whether it
would be enough to cover the payments. I would like to get that done as soon
as possible but I have no idea where to go for a loan.”
Sara and her boyfriend, Jimmy, a 23-year-old student, plan to move to London
in September to be nearer Green Park, where she works as a writer for
Business Traveller magazine on a salary of £16,000. “We can probably afford
about £500 a month each in rent,” she says. “I think that we would be best
off renting for now given the reports of house price falls. Also, I don't
know how we would get a mortgage.”
Current accounts with Nationwide and Halifax have overdrafts totalling £1,750.
Sara has no investments and only £52 in an ING Direct Savings account. But
she is keen to change this situation. “I hope to pay off my overdraft within
two months,” she says. “Some advice on where to put the money I make after
that would be extremely helpful.”
To clear her debt quickly, Sara is now living on the bare minimum and says: “I
spend about £80 a month on groceries and £326 a month on my season ticket
from Eastbourne to London. That, literally, is it. We don't really go out
and I'm not spending anything on the usual things; books, music or whatever.”
Sara does not have a pension with her employer and would like to know whether
this is something that she needs to address. “However, I don't see how I
could afford contributions now,” she adds.
Once her finances are back in the black, Sara will have to budget for a host
of everyday expenses, including broadband, phone and utility bills, travel
within London and a social life.
She and Jimmy love to travel and would like to make another big trip within
the next year or two.
Sara Turner: what the experts say
FINANCIAL PLANNING 1 Dennis Hall, Yellowtail
“Sara has made a paper gain of £17,000 on her property. Low interest rates and
high property inflation have made it easy to borrow cheap money, invest in
property and turn a profit. With conditions now swinging the other way,
Sara's financial position does not appear strong enough to ride out the
storm. The rental income does not cover her mortgage, let alone insurance
and maintenance. Gaps between tenants will mean that she has to meet the
repayments, and she barely has enough money as it is.
“If Sara stress-tested her finances, basically asking ‘what if', it is clear
that her position could range from uncomfortable to impossible. If property
prices fall as far as is being predicted, then Sara could be facing negative
equity. If, on top of this,
she lost her tenants or her job, she would be in dire straits, even to the
point where she may consider bankruptcy.
“My advice is to sell and be thankful for any profit. This isn't based on
knowledge that the market will fall, but on the financial disaster that
could await Sara if it does. She should also avoid pumping more money into
the property. She cannot do it from her own resources and it would be
reckless to borrow more. Nor can she afford to take on any additional
commitments, including a pension. Reducing debt must remain a priority.
After that, she needs to build a cash buffer - a cash Isa would be perfect.”
Action plan
Look at selling the property now.
Continue to repay debt and do not be tempted to increase it.
Use cash Isa to save a buffer fund.
FINANCIAL PLANNING 2 Andrew Collett, Evolve
“Sara should concentrate on saving while staying with her father and clearing
her overdrafts. After this, she could start to save into her existing ING
account. Although the 4.75 per cent gross interest rate is not the best on
small deposits, it may be worth sticking with to save the hassle of opening
a new account.
“She should look to save a sum equal to about three months' salary, say
£4,000, as a rainy-day fund. She will also need to pay a deposit and one
month's rent upfront when she moves to London, which will deplete her
savings initially.
“Sara is not making enough in rent to cover the buy-to-let mortgage. This will
drain her resources if it carries on, and being in London will make managing
the property even more challenging if she encounters bad tenants. As for a
loan to upgrade the property, she would need to be confident of meeting the
repayments. With her finances already stretched, she will not want to be
saddled with more debt.
“If she is unable to guarantee a rental that covers the mortgage, she could
consider selling the property. If she can get a good price, she could use
any equity to help to pay off her debts and have money to help to buy a
property nearer London in the future. She should check any early redemption
penalties on the mortgage, which might prove costly.
“Sara should not worry about pension saving; she has enough on her plate. The
new flexible rules introduced in April 2006 mean that she can catch up
later. But she should not leave it too long.”
Action plan
Pay off overdrafts before saving.
Save into existing account.
Consider selling property.
MORTGAGES
Jonathan Harris, Savills Private Finance
“Sara is fortunate to have fixed her buy-to-let mortgage last October at 5.99
per cent for two years, as rates have risen considerably as a result of the
lack of liquidity in the market.
She is concerned about the property falling in value, but as long as she keeps
it for the longer term, prices tend to recover.
“The obvious downside is that the rent is £100 a month short of the £560
mortgage repayments. There is also nothing spare to cover property
maintenance or to build a fund to cover void periods. She needs to increase
the rent, if she can, and adding another room should allow her to do this.
The best way to raise the £3,000 for this work is a further advance from her
lender. But lenders have different minimum requirements when sanctioning
further borrowing, so she might need to consider a personal loan instead.
“With regard to moving to London, Sara and her boyfriend are unlikely to
be able to afford a mortgage.They would need at least a 5 per cent deposit
and she has no savings. Also, it may be worth waiting until prices hit
bottom. It would make more sense to save for a deposit in a high-interest
savings account and aim to buy in a few years' time when she is in a
stronger financial position.”
Action plan
Review rental income.
Ask lender about further advance.
Start saving a deposit.
Sara's response
“The advice is helpful but it doesn't tell me much I didn't know. I
think urging me to sell is an extreme reaction, though I agree that everyone
is struggling. I hope they understand that I am cutting my spending to zero
to cut costs.
“Saving up a rainy-day fund of £4,000, as suggested by Mr Collett, is a very
good idea, though, and something I will definitely be aiming to do.
“I am now in the process of getting the £3,000 I need for the work on my house
as an advance from my lender. Mr Harris mentioned that possibility. He also
talked about not buying in London now, but that was never something that we
planned on.
"I do think that the experts are right on holding out on the pension for the
time being. I already have some contributions from a previous job.”
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