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Wealth Check: “How
do we manage the move from an interest-only mortgage?”
Published: January 2005
This article appeared in The Independent
Save and Spend Supplement.
Sam and Rebecca Hall, 26, Consultant/Teacher
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Salary: Sam - £33,000
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Rebecca - £23,000
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Debt: Sam: Student loan £7,000. Car £6,500. Credit Card
£500. Overdraft £566.
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Rebecca: Student loan £7,000. Overdraft £1000.
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Property: £155,000 HSBC interest only mortgage. Fixed for two
years at 5.29%
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Savings: mini ISA £3,000. £250.00 a month in e-account.
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Pension: Rebecca: member of teachers’ scheme
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Monthly outgoings: Food £200. Mortgage £680. Car £230.
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Insurance £100. Bills £80. Entertainment £350.
Sam Hall works at a consultancy in the Thames
Valley: his wife, Rebecca is a teacher. The couple have recently bought
a house and have a mortgage aimed at first time buyers with three years
as an interest only loan.
Mr Hall wants to make sure his budget can
accommodate the increase in outgoings when mortgage repayments start in
three year’s time. The couple might also start a family in that
time, and want to know whether they will be able to afford the drop in
salary if one of them goes part-time at work.
In addition, Mr Hall wants advice on how
best to plan for his retirement, given that his employer does not currently
make any pension contributions.
We put this case to Patrick Connolly at John Scott and Partners, Elliot
Nathan at Charcol and Ben Gibbs at Glazers.
BORROWINGS AND SAVINGS
The Hall’s have managed to arrange
most of their borrowings efficiently. Nathan points out that it is hard
to beat the rate charged by the student loan Company – 2.9 per cent
– so there is little point in moving that money.
At 6.5 per cent, the car loan is also competitive.
The Halls could, though, switch to a zero per cent credit card deal, such
as those on offer from Virgin and Abbey.
They could also take advantage of the introductory interest free period
and move their overdrafts to such a card.
Connolly cautions that the interest the Halls earn on their savings is
more than outweighed by the cost of their overdrafts to such a card. He
suggests using savings to pay off debts.
Gibbs agrees. Even the most competitive ISAs do not cover the cost of
the overdraft or credit card interest. The interest on the Nationwide
e-savings account is taxed, so it only brings the equivalent of four per
cent net.
The Halls should, though, look to build up their savings again once they
have paid off their loans. The first thing they should do, Connolly says
is use up their cash ISA allowances, currently £3,000 each. If they
can save more than this, they should look at other high-interest accounts.
Nathan suggests that the couple should aim to build up a cushion of at
least three months’ income.
MORTGAGE
Nathan agrees that the Halls mortgage is
a good way to start on the property ladder: However, the Halls will face
two jumps in payment. The first is after two years, when they move from
a standard fixed rate to HSBC’s standard rate. This will put their
payments up by £62 a month, at current interest rates. After three
years, they will start making capital repayments. This pushes the monthly
cost of their loan to £1,020 a month. At that point they could shop
around for a fixed-rate deal. Based on today’s interest rates, a
fixed rate with IF at 4.95 per cent would save £70 a month.
But the couple might also need to divert spending from other areas, especially
if they do start a family.
PENSIONS
As a teacher, Mrs Hall should have access
to an occupational pension scheme. Mr Hall, however has to make his own
arrangements. Connolly suggests that Mr Hall should work out how much
he can afford to save and divide this between investments in stocks and
shares ISAs – he can put in £3,000 a year under current rules
– and a stakeholder pension , where the limit is £3,600 (after
tax relief). Splitting the money this way balances the tax breaks of a
pension with the flexibility of ISAs, as he cannot access pension money
until he retires. Mr Hall should also make sure his savings are spread
across a good range of assets, including shares, fixed interest (bonds)
and property.
Gibbs says that in order for Mr Hall to retire on half his current income,
in today’s terms, aged 70, he would have to put £350 a month
into his pension.
However, due to tax relief he will be able to invest £100 for every
£78 he pays in. But he should balance this with stocks, shares,
property and cash. The important thing is to make sure investments are
performing.
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