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Wealth Check: 'Should I rent and save or buy a house
with my son?'
By Stephen Pritchard
Published: 06 November 2004
This article appeared in The Independent Save and
Spend Supplement.
The problem
Marion Mitchell has just reached her 53rd
birthday and she wants to make sure that she is making the most of her
finances.
She recently decided to sell her house,
as she felt she could get a good price for it. Her son has left home and
she neither needs nor wants the responsibility of a large mortgage any
more.
But she is unsure of what she should do
next. She could buy a smaller property now, or wait a few months and then
buy. She could go into long-term rented accommodation and use the money
as a pension fund.
She has also thought about buying a house
with her son, although she would continue to live there. This, she believes,
could enable her to benefit from a longer-term mortgage and lower monthly
repayments. It would also be a good investment for her son. But could
she buy such a property on a buy-to-let basis?
MARION MITCHELL, 53, SUPPLY TEACHER
Salary: £26,000.
Debt: £6,000: five-year loan with
Sainsbury's (8%), £4,000; credit card with Egg, £2,000.
Property: Recently sold.
Savings: £133,000 (including proceeds
from house sale), 3.75%. Premium bonds worth £30,000.
Investments: None.
Pension: Expects state pension plus £1,000
pa.
Monthly outgoings: Rent £300, loan
and insurance £200, expenses £300, son's rent £230.
We put her case to Ben Yearsley at Hargreaves
Lansdown, Justin Modray at BestInvest, and Ben Gibbs at Glazers.
DEBTS
Ms Mitchell has a large sum on deposit but
she still has debts. Mr Gibbs estimates that with an interest rate of
about 8 per cent on her loan, and up to 14.9 per cent with Egg, but interest
of just 3.75 per cent before tax on her savings, Ms Mitchell could save
£400 a year if she paid off her debts now.
Mr Yearsley says that if there are no significant
repayment penalties on the Sainsbury's loan, Ms Mitchell should repay
it now. Likewise, she should pay off the balance on her credit card. Mr
Yearsley suggests that Ms Mitchell should then move her cash from her
current bank to one that pays more interest. Abbey offers 5.1 per cent
on its e-saver account, managed over the Internet. The AA's telephone
banking account pays 5.35 per cent. Ms Mitchell should also ensure she
uses her cash Isa allowance.
Mr Modray points out that Manchester Building
Society pays 5.2 per cent gross, and ING Direct pays 5 per cent. Ms Mitchell
has some premium bonds and these pay 3.2 per cent tax-free, on average.
The return is not guaranteed, although there is the chance of winning
a jackpot. But Mr Modray says that she should look elsewhere for a reliable
income stream.
He thinks Ms Mitchell should look to put
at least some money into the stock market through a good managed fund.
She could do this through a stocks-and-shares mini-Isa. An income or corporate
bond fund might suit Ms Mitchell's risk profile.
PENSION
Mr Gibbs says that Ms Mitchell should ask
the Pensions Service for a projection of how much she will receive from
the state pension. She should also ask for a forecast from her occupational
pension. This done, Ms Mitchell needs to decide how to balance her need
to boost her retirement income against her other financial objectives.
As Mr Yearsley points out, simply holding on to cash to provide a pension
is not really an option, as inflation will erode its value.
If Ms Mitchell can join an occupational
pension scheme, she should look at doing so. If that is not an option,
then she should investigate Stakeholder pensions. These are tax-efficient
but Ms Mitchell cannot simply transfer her money into a pension fund as
a lump sum. The annual limit for a Stakeholder contribution is £3,600
a year gross, with somewhat higher limits based on higher earnings.
PROPERTY
Mr Modray suggests that buying a property
will give Ms Mitchell the most long-term security, although it will eat
into her savings. But if she is able to buy a property for cash, then
the money she would otherwise be paying in rent can go towards saving
for a pension.
Mr Gibbs says that continuing to rent will
give Ms Mitchell the most flexibility, but less stability. If she were
to buy, she would need to consider any mortgage very carefully, as a standard
mortgage term would run beyond her retirement.
Mr Yearsley says there may be no immediate
urgency for Ms Mitchell to buy. But over time, renting is dead money and
if prices start rising again, Ms Mitchell could find herself priced out
of the market. If she does opt to buy, it will put her in a position to
help her son with his property needs. But if they buy together, Mr Modray
recommends that they decide, in advance, on what they should do if one
of them wants to sell the property and move on.
Mr Gibbs adds that if Ms Mitchell does buy,
she also has the option of taking in a lodger.
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