As financial quandaries go, Matthew Pollard’s is the kind that most of us
would be only too happy to have.
The 25-year-old trainee accountant is being bought out of the three-bedroom
maisonette he purchased with an old schoolfriend two years ago in Islington,
North London. He hopes to take away £50,000 from the deal and says: “We each
pay half of the existing £335,000 mortgage, which costs me £950 a month. In
the next couple of months my friend, who is a qualified lawyer, will
remortgage to release the equity required to buy me out of the property and
will take over all the mortgage payments.
“The flat is now worth about £500,000 and we paid £365,000 for it in 2006, so
my friend will pay me a share of the increase and I will be free to start
another mortgage.”
Armed with an additional £50,000 loan from his mother, which must be used to
buy property, Matthew intends to look for a place of his own in southeast
London – an area that he has chosen because he plans to play for a local
rugby team in his spare time.
He wants to know what he can realistically afford and what that would buy in
the triangle of southeast London comprising Tulse Hill, Herne Hill and West
Dulwich.
Matthew says: “If I keep things simple and put down a deposit as well as
borrowing four times my salary (soon to rise to £40,000), I think I should
be able to afford something like a £260,000 two-bedroom flat in Tulse Hill.
My mortgage would be smaller than my existing one and this would cut my
outgoings.”
He also wants to consider other options and says: “I have a further £23,000 in
a cash deposit account. I could use this to boost my deposit and perhaps
take in a lodger as well. In this way, I might be able to afford a
three-bedroom flat in the same area, costing about £370,000. However, I need
some advice on whether this would be too adventurous and whether,
realistically, the numbers would stack up.”
A radical alternative, which he is also considering, would be to rent for the
time being and plough the £50,000 from his share of the sale of the
Islington flat, plus the £23,000 on deposit, into a portfolio of
investments. However, he would not be able to invest the additional £50,000
that his mother is holding.
Matthew says: “I have a potential sum of £73,000 to invest and would like some
advice on how I could build up a portfolio that would take fairly high risks
to achieve what I hope would be high rewards. I am very interested in
emerging markets, including Turkey, Russia and India, because I believe that
is where the fastest economic growth will be.”
Other more exotic options that Matthew would consider are biofuels and hedge
funds, though he admits that he does not know much about these areas and
accepts that they are at the very high-risk end of the spectrum.
Matthew has no dependents and no pension provision at the moment, adding: “My
employer does offer a pension scheme but I have decided not to join yet
because I have been putting everything into my flat. I realise that I should
start one at some point but, at my age, I think I can afford to wait for a
couple of years.”
Financial CV Earnings: £40,000 a year.
Savings: £23,000 in cash deposit account, an estimated £50,000 to come
from flat buyout, £50,000 loan from mother to be used only for property
purchase.
Investments: None.
Pension: None.
Objectives: To decide between using savings to buy property, or to put
some of the money into a fairly high-risk investment portfolio.
Matthew Pollard: what the experts say
MORTGAGES Richard Perry, Savills
Private Finance
“With a deposit of about £100,000 from his flat buyout and the £50,000 loan
from his mother, Matthew will have a greater choice of mortgages and access
to better rates, as he will be regarded as lower risk for lending purposes
than someone who has a high loan-to-value (LTV) ratio.
“However, lenders will not take into account any potential income from renting
out a room in his new flat. They will consider only his income, which will
soon rise to £40,000 a year. Using a four times income multiple is a good
starting point, but lenders such as Abbey and HBOS also use affordability
calculators, which take account of outgoings, too.
“Matthew does not mention any other borrowing, so he should be able to achieve
a mortgage of £200,000. Along with his deposit, this means that he can look
at properties costing £300,000.
“A £200,000 mortgage would cost about £930 a month on an interest-only
two-year fixed rate of 5.59 per cent with the Halifax. This is available up
to 90 per cent LTV with a £1,499 fee. On a repayment deal, it would cost
£1,200 a month.
“If Matthew chooses an interest-only loan, he must look at how to repay the
capital, as this will still be outstanding at the end of the term. One
option is to switch to a repayment deal after a couple of years, perhaps
when his salary has increased. Alternatively, he could invest in Isas and
put the tax-free returns towards repaying the capital in the longer term.”
Action plan
Use money from flat buyout and loan from his mother as deposit on a property
costing about £300,000.
Decide between repayment or interest-only mortgage.
Think about a savings plan to pay off the capital if he opts for an
interest-only loan.
INVESTMENTS
Julie Lord, Cavendish Financial Management
“If Matthew is proposing to buy a home in London in the near future, all his
available capital should be used for this.
“However, if he wants to stay flexible because he thinks that he might move
out of London and does not expect to purchase anywhere for a few years, then
it may make sense to take some investment risks in the hope of significantly
increasing the capital in the meantime.
“For the investment option, and as Matthew is obviously a speculative
investor, I would suggest that he invests the £73,000 available capital in a
combination of Russia, China, India, commodity and natural resources funds.
It is a particularly good time to buy into these areas because all have
fallen recently and look like good value. Some funds to consider are
Fidelity EAAF, Neptune Russia, Gartmore China Special Opportunities,
Fidelity India Focus and JPMorgan Natural Resources.
“With the other £23,000, I suggest he keeps £3,000 in cash for emergencies, as
he appears to have no other money, and invest the remaining £20,000 in
less-risky investments, such as traded life funds, to balance some of the
risks in the other funds.
“This portfolio is likely to be volatile, so he should be prepared to hold it
for the long term.
“Finally, Matthew needs a reality check on pensions. Unless he is expecting a
massive inheritance, he needs to start saving as much as he can for his
retirement or he will have a nasty shock when he gets there.”
Action plan
Put £50,000 in speculative funds, £20,000 into traded funds and keep £3,000 in
cash for emergencies.
Start saving in a pension scheme.
PROPERTY
Danny Midani, Haart Estate Agents
“Matthew’s choice of properties will be either a two or three-bedroom flat in
Tulse Hill, Herne Hill or West Dulwich. He could also look at some two or
three-bedroom houses that require attention. This part of South London is
very popular because good rail links make Central London easily accessible
and there are two excellent schools.
“Two-bedroom period apartments in the Tulse Hill area range from £225,000 to
£295,000. In West Dulwich and Herne Hill prices are slightly higher, from
£245,000 to £310,000.
“At the top of his budget, Matthew will be able to specify properties
that benefit from a longer lease, possibly a share of the freehold and a
private garden.
“Many people in Matthew’s position elect to aim for two or three-bedroom
freehold properties, which are available from £350,000 to £450,000, subject
to their location and condition.”
Action plan
Choose between two-bedroom apartment or three-bedroom house that needs work.
At top of budget, go for property with longer lease or shared freehold.
LINKS
Savills Private Finance: 0870 9007762, www.spf.co.uk
; Cavendish Financial Management: 08456 442544, www.cavendishonline.co.uk
; Haart: 020-8761 1737, www.haart.co.uk
Matthew’s response
“I have had an offer accepted on a two-bedroom, two-bath flat for £285,000 and
have obtained a two-year tracker mortgage for £185,000 at a current rate of
5.64 per cent.
“This means that I have used up my equity from the previous property, plus my
mother’s £50,000 loan. I am planning to cover most of the mortgage
repayments by renting out the other bedroom in the flat.
“I like the idea of investing in Isas and any excess money I have will be
going into some of the funds recommended, though I won’t have as much to
invest as I would have done had I decided to rent. I take the point that I
should regard these as long-term investments. In the meantime, I am keeping
£2,000 in Premium Bonds for emergencies.
“I also note the point that I have done nothing so far about a pension.”
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