Stuart works for a security railings company and earns around £34,000 a year, plus a £5,000 bonus. Louise earns £8,000 a year working part-time at a school.
They have no debts apart from a £40,000 mortgage on their home, which is worth £130,000. They bought the house for £50,000 through the Right to Buy scheme in 2013 and so they can’t sell it for another three years.
The couple currently save around £500 a month, but say if they cut back on holidays and their second car they could increase this to between £800 and £1,000 a month.
Stuart has a cash Isa with £5,000 in it, and £3,000 in a current account that pays an impressive 5pc on balances up to £5,000. He also has £1,600 in another savings account that pays 4pc and is making regular monthly deposits of £400 into this.
He expects to move £10,000 into his cash Isa before next year’s deadline.
Stuart describes his attitude to investment risk as “medium”. “I really want to be mortgage free as soon as I can in order to try and build a property portfolio to supplement our retirement income,” he said. “I have only just recently started paying into a pension – to my detriment I know – so am conscious of the need to do whatever I can to provide a decent standard of living in later life.
“We are overpaying on our mortgage and expect to have £70,000 equity in our current house by the time we sell it in 2018. Can we use this to kick-start our investment plans?”
Georgina Partridge, partner at Plutus Wealth Management
Stuart’s goal to upsize to a three-bed house is certainly achievable on the couple’s current level of income. In three years, they expect the equity in their current home to be £70,000. This can be used as a deposit for their new property or split into a deposit for a new house and a buy-to-let.
A three-bed property in their area will cost around £160,000. If they put down the full £70,000 as a deposit, they will have access to good rates with most lenders.
For a buy-to-let, they should be looking at a 25pc deposit. If they split the £70,000 equity, £40,000 could go towards the new home, leaving £30,000 for a buy-to-let.
Technically, this would mean that the purchase price of the buy-to-let would be around £120,000. However, buy-to-let borrowing is based on rental income. They would need to generate around £500 in rental income to borrow that amount and they will need to work out if this rental income is viable on a property of this value in the area they are looking in. They must also consider whether the profit is enough to make it worthwhile.
On the savings front, Stuart’s current account that pays 5pc is a good deal and should be utilised up to the £5,000 mark first before putting money in the savings account at 4pc.
The full Isa allowance for the current tax year is £15,240, so they have plenty of scope to utilise this. I would suggest considering stocks and shares-based Isa investments, especially if they are looking at a more medium to long-term time horizon.
They haven’t mentioned a fallback plan. Stuart is the main breadwinner in the family, so if something were to happen to him there would be a lot of pressure on Louise to maintain repayments on the mortgage and pay the bills, so I would suggest looking into life insurance or family income benefit as a minimum. Stuart may also want to consider income protection and critical illness cover.
Peter Chadborn, IFA at Plan Money
It would be wise for Stuart and Louise to consider upsizing ahead of starting a family, because mortgage lending is based more on overall affordability than just income. Having a young family would probably reduce their borrowing capacity.
I would question the strategy of overpaying on their mortgage repayments. The advantage of doing so is to create more equity in their property or save interest over the long-term. For many people this is a sensible strategy, but the cost of borrowing is at an all-time low and this money could be put to better use, such as increasing their savings pot to boost the deposit for the buy-to-let.
Stuart has done well with the interest on his savings. In principle, his plan to transfer savings into his cash Isa to utilise as much of the allowance as possible is wise. Before doing so, however, check the Isa interest rate. Although Isas benefit from tax-free interest, a savings account taxable interest rate of 4pc is still better than an Isa tax-free interest rate of, say, 2pc. In addition, from April 2016, basic-rate taxpayers can earn £1,000 a year each in savings interest before paying tax so that could further reduce the attraction of cash Isas.
The overall plan of buying one or two buy-to-let properties would mean they have much of their asset base and retirement income provision in the same asset class. Too many eggs in the same basket can be risky, not least because property is very illiquid and not tax-efficient. It would be reasonable to include one buy-to-let property in their plans as long as it is complemented by pension provision and other flexible, accessible investments such as stocks and shares Isas. The combination of property, pensions and investment Isas will create an important blend of diversity, flexibility, accessibility and tax-efficiency.
For now, Stuart and Louise’s pension contributions are fine. Stuart is aware that he has left it late to start saving, but 8pc of salary is decent and Louise is likely to be a member of her employer’s final salary scheme which will represent good value.
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