Rachael and Chris Wilkinson want to navigate the safest course possible to
invest for their young sons' future, but the couple are uncertain of what to
do for the best.
Rachael says: “We've been bitten in the past by poor investments, such as
endowments, and are looking for something extremely low risk to invest in
for Thomas, 9. and James, 6. We don't like the idea of putting substantial
sums into shares or stakeholder funds and would rather accrue interest at a
minimal rate, than risk losing money. We've had help from Times Money in the
past and thought we'd turn to you with this latest quandary.”
The Wilkinsons, who live in Old Portsmouth, Hampshire, are both civil servants
in departments supporting the Royal Navy. Chris, 46, is in engineering and
computing, while Rachael, 36, works with manpower data.
“We are considering buy-to-let for our boys' future and have been looking at
two-bedroom flats locally - the cheapest are about £90,000. The rental
market seems to be quite strong as agents are advertising for more rental
properties at the moment. Portsmouth University is nearby and is one of the
biggest institutions on the South Coast, though we are not sure if we would
want to let to students. We may prefer professional people as tenants to
keep down the maintenance costs.”
The Nationwide mortgage on Chris and Rachael's three-bedroom townhouse is an
interest-only deal fixed at 5.45 per cent until 2012. Their monthly
repayments are £128 and the outstanding balance is £30,000, which should be
cleared in 2012 by an endowment policy. Rachael says: “We bought the house
in 2001 for £227,500 and it's now worth about £325,000 - but like everyone's
it is falling in value.”
The couple's joint income is £3,700 a month after tax and their other monthly
outgoings include £330 for council tax, utilities and phone, £470 on food
and drink, £120 on clothes and shoes, about £100 on socialising and £60 on
petrol. “Chris drives to work and I walk the children to school and then get
a bus laid on by the department that I work for,” Rachael says.
They pay off their credit cards in full every month and have no other debts.
Rachael adds: “We don't live beyond our means, but our one financial
weakness is having too many accounts. We have tried to consolidate them but
it does become awkward when you are rate-chasing to get the best deals. We
have ten Halifax savings accounts for ourselves and the children, with about
£40,000 in total. The rates range from 0.6 per cent, including conditional
bonus, on a Halifax Monthly Saver, to about 10 per cent, fixed for 12
months, for the childrens' savings.”
The Wilkinsons also have £21,000 split between six cash Isas - four with
Portman/Nationwide and two with NatWest. Rachel says: “We are transferring
them to a NatWest e-ISA at 3.51 per cent, the best high street rate.”
Although they are opting for NatWest's e-ISA, they have moved their current
accounts from the bank. Rachael explains: “After many years with NatWest
Private Banking, it wanted to downgrade our account or charge extra for the
service that we had always received.”
The couple have £1,550 in Premium Bonds and £350 in a Child Trust Fund with
Britannia, paying 3.05 per cent. Rachael says: “This is a CTF account for
James. It contains only the money from the government voucher we received
several years ago. We do not put any additional money into it”.
They have Aviva shares worth £1,060 and pay £38 a month into their
Aviva/Norwich Union endowment policy, which is linked to their mortgage and
due to pay out in 2012. It is currently worth £18,500.
Both Chris and Rachael are members of the Civil Service pension scheme. “Chris
has been in his scheme for 30 years and I have been in mine for 18 years,”
Rachael says.
“Our only extravagance is two holidays a year, which cost about £3,500 each.
This year we are going to Cape Verde and Tenerife. We also need a new
kitchen and a new en suite bathroom sometime soon, which will probably cost
about £7,000 in total.”
The Wilkinsons: What the experts say
Financial Planning, Danny Cox, Hargreaves Lansdown
“Rachael and Chris are in a good financial position generally.
“Their Aviva endowment may attract extra bonuses if redistribution of its
inherited estate goes ahead, but if the policy is not on track to pay off
the mortgage, they may need to use some savings to meet any shortfall.
“Being risk-averse, it seems unwise to retain the Aviva shares. They should
sell them and repay part of the mortgage if their deal allows.
“Investing in property is not risk free. According to the Halifax property
index, residential property has fallen by an average of 18 per cent since
2007 and is likely to fall farther. Buy-to-let mortgages are few and
expensive - Allied Irish Bank offers one at 5 per cent, with a 25 per cent
deposit and an arrangement fee of 1 per cent.
“There are bargains at distressed sales, but they need to be comfortable with
the risks.”
Action plan
Consider selling Avivia shares.
Be aware of buy-to-let risks.
Financial Planning, Adrian Anderson, Savills Private Finance
“Rachael and Chris are in a strong position. However, their mortgage is
interest-only so they are not repaying any capital. The repayment source, an
endowment with Aviva, was worth £18,500 last year, but it is worth getting
an indication of its worth by 2012, when the mortgage ends. If it is not on
track to repay the capital, they need to consider other options, such as
overpaying - Nationwide usually allows overpayments of £500 a month - or
saving extra cash each month, or using existing savings.
“A buy-to-let investment does not fit the couple's ‘no-risk' profile because
they could lose money if the housing market continues to fall. Before
proceeding, they should research carefully to ensure that they buy in an
area where there is no problem finding tenants. They must also be able to
cover tenancy voids.”
Action Plan
Contact Aviva for policy projection.
Plan for tenancy voids.
Buy-to-let mortgages, RayBoulger, John Charcol
“The Wilkinsons must bear in mind that buy-to-let is not without risk.
However, the current fall of about 25 per cent in property prices generally
- more on many flats - plus low interest rates, mean that investing in a
buy-to-let this year will prove a good long-term, and comparatively
low-risk, investment. Property is likely to be a buyers' market for some
months.
“As the mortgage is £30,000 on a property worth about £300,000, all borrowing
for the buy-to-let should be on their residential property because rates and
arrangement fees are cheaper than on buy-to-lets. Even if they borrowed the
whole £90,000 purchase price, the loan-to-value ratio would still be only 40
per cent. The mortgage interest would be tax-deductible against the rental
income, as the purpose of the loan, not what it is secured on, determines
whether tax relief is available.
“It would be worth paying the £1,500 early repayment charge (ERC) on their
current Nationwide deal to lock in to a good long-term rate. After the Bank
of England's announcement about the money it is ‘printing', longer-term swap
rates fell sharply and I expect ten-year fixed rates to be available soon at
about 4.5 per cent.”
Action Plan
Pay ERC on Nationwide mortgage. Remortgage current property to purchase
buy-to-let.
Buy-to-let mortgages, David Hollingworth, London & Country Mortgages
“Rachael and Chris seem to be aware that research is vital for buy-to-let -
there is no point buying the cheapest flat if it lies empty for long
periods. The buy-to-let market has been hit by the liquidity crisis, with
fewer lenders offering finance and borrowers needing a deposit of at least
25 per cent. Criteria have also been hit and lenders typically demand that
rental income covers the mortgage interest by 125 per cent. Fees are often
at least 2.5 per cent higher than mainstream owner-occupier loans. One good
deal is Coventry's five-year fix at 5.4 per cent with a £1,250 fee, but this
is available only for 65 per cent of the purchase price.
“One option is to withdraw equity from their main residence, which opens up
the possibility of cheaper interest rates. However, instead of being based
on the potential rental income, the level of borrowing would be assessed on
Chris and Rachael's earned income, though that should not pose a problem.
“Property investment carries risk, with no guarantee of rising prices. But
they are approaching the buy-to-let purchase as a long-term investment and,
in a tough market, are in a position to bargain hard.”
Action Plan
Look at withdrawing equity from current property.
Build cash buffer for tenancy voids.
Attitude to risk requires reassessment
Rachael's verdict
We can only repay 5 per cent of our mortgage each financial year and have
already done so for the year 2008-09. We cannot make further overpayments as
our mortgage is an ex-Portman product and tied in to the conditions we
signed up to.
“Chris would like to sell the Aviva shares but they have already dropped so
much that I would like hold on in the hope that they increase in the long
term.
“It's a great idea to ask Aviva for a policy projection so that we can work
out how much of our savings we need to set aside to repay the remaining
mortgage in 2012. We intend to use some savings for this and it depends on
the interest rates at the time as to exactly where the money will come from.
“We did not realise that the property market is forecast to fall farther. As
we are risk averse, we need to work out how we would feel about buying a
property that could fall in value. We also need to do our sums to see how we
would cover potential tenancy voids and letting agent's fees.”
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