Sarah and Leon: We want to buy our ‘forever’ home in five years
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Sarah and Leon, from Merthyr Tydfil in Wales, want to buy their ‘forever’ home in five years and retire in 30 years on a good income.
Sarah, 35, is a financial controller while Leon, 32, was formerly in the army but has just started working as a plumber.
The married couple already own a home, plus a rental property.
They have £60,000 in bank accounts, and will be able to save around £500 a month going forward, but are at a crossroads on what to do with their funds.
They are considering buying another property, and doing it up to resell and make a profit.
But they are also wondering whether to set up a medium risk investment portfolio – avoiding anything high risk like Bitcoin – to achieve their goals.
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Sarah and Leon’s savings and investments
Risk appetite: Medium
Time horizon: Five years to buy a forever home, and 30 years to retire with a good annual income
Investment trusts and ETFs: None
Cash: £60,000, but out of this they want to keep about £10,000 in the bank ‘just in case’ and to spend on a van for Leon’s work, leaving them £50,000 to put towards their longer term goals
Properties: Home they bought for £85,000, now worth around £100,000, which has a £65,000 mortgage. Rental property they bought for £70,000, now worth £80,000, which has a £48,000 mortgage. The rental income is £450 per month
Premium bonds: None
Kay Ingram, chartered financial planner at independent financial adviser group LEBC, writes: Sarah and Leon have done well to own their own home and to have acquired a buy-to-let property in their early 30s.
Leon’s plumbing skills could help them to work their way up the housing ladder through renovation, but they need to think carefully before embarking on another buy-to-let purchase as their earlier success may not be easily repeated.
One of their ambitions, to own their ‘forever’ home in the next five years, means they may either need to move home sooner or stay put for that period and diversify their savings.
They are wise to flag retirement savings as their other goal. Setting aside some of their surplus income now will give them greater choice around their retirement and the lifestyle they can enjoy.
Should Sarah and Leon buy another property?
Buying another smaller property to renovate and let may not maximise their property value as house prices in their part of the country, Merthyr Tydfil, are slowing.
According to Zoopla average prices have fallen 1 per cent over 12 months. As existing home owners, they would pay 3 per cent stamp duty on any new purchase that is not their main home, adding £2,523 to the cost of the average terraced house in their region.
Kay Ingram: ‘Diversifying their savings into areas other than property may be less risky than piling everything into bricks and mortar’
The rental yield from their current buy-to-let property is 3.12 per cent before tax, 2.49 per cent net of tax. If they had a void period, with no income, the mortgage will still need to be paid.
Owning three properties, all in the same price bracket and location, makes this a high-risk strategy if the market continues to slow.
Their renovating skills may be better employed if they move to another larger property, which would be their home at the same time. This will save on stamp duty and should produce a bigger monetary gain.
They would suffer disruption while doing up their own home, but this would give them a larger property to sell in the longer term. Without increasing their current borrowing, they could buy at around £185,000.
They may move again for their dream home but doing this in two steps is probably more achievable. If by then Leon is more established in his job or business, they will also have greater borrowing capacity.
How might they put their finances on firmer foundations?
If Sarah and Leon don’t want to move now, then diversifying their savings into areas other than property may be less risky than piling everything into bricks and mortar.
First to strengthen their financial foundations, they should take the following steps:
* Set aside three months’ outgoings, say £8,000, in an easy access savings account;
* Get life assurance if they haven’t already – it should cover both mortgages and leave a surplus capital sum for the survivor;
* Review sick pay provision – Sarah should get statutory sick pay (£92.05 a week for 28 weeks) but if Leon is self-employed he may need insurance to protect his pay in the event of accident or illness.
They bought their home at a loan to value of 76 per cent. House price growth means they now owe 65 per cent, so re-mortgaging could deliver savings.
Assuming there are no applicable penalties, paying off £15,000 will reduce it to 50 per cent and saves more. Re-mortgaging on a fixed rate would stabilise their outgoings and give them a known cost as interest rates begin to rise.
An arrangement fee of £1,000 is typical with such mortgages. Based on a 50 per cent loan to value, five-year fixed rates are available at as low as 1.83 per cent over the deal period, according to This is Money’s mortgage finder, after which the rate will rise.
How might Sarah and Leon invest for their future?
Once they have taken the steps above, the couple’s remaining £33,000 could be invested in two stocks and shares Isas.
Adults can contribute up to £20,000 per year – so that’s £40,000 between the two of them in the current financial year – and these savings are free of both income tax and capital gains.
Sarah and Leon would be taking a five-year view and are willing to take a medium risk. Many financial providers and advisers create model portfolios designed for this level of risk and giving the potential for growth over this time frame.
Llwyn-on Reservoir near Merthyr Tydfil: Sarah and Leon live in a beautiful part of Wales, but house prices in the region have fallen 1 per cent over 12 months and it might be a risk to buy a third property there
These are widely available, but for illustration LEBC’s own Balanced Growth Isa portfolio is below. We select and review the funds, but they are invested with a myriad of fund managers totally independent of LEBC and selected from the whole market.
We also outsource our research to a third party independent research company which we pay for, so there is no question of any bias.
|Artemis UK Select||8.00%||0.82%|
|Baillie Gifford International||15.00%||0.61%|
|First State Global Listed Infrastructure||4.50%||0.80%|
|Franklin Templeton Global Total Return Bond||2.00%||0.82%|
|iShares UK Equity Index||10.00%||0.06%|
|L&G UK Property Feeder||8.50%||0.75%|
|M&G Optimal Income||13.00%||0.91%|
|Schroder QEP Global Core||10.00%||0.32%|
|Threadneedle European Select||4.00%||0.83%|
|Threadneedle UK Equity Income||7.50%||0.83%|
|CF Woodford Equity Income||7.50%||0.75%|
What is an ‘ongoing charge figure’?
The ongoing charge is the investing industry’s standard measure of fund running costs. The bigger it is, the costlier the fund is to run.
The ongoing charge figure can be found in the Key Investor Information Document (KIID) for any fund, usually at the top of page two.
To track down these documents, put the fund name and ‘KIID’ together in an internet search engine. Read more here about investment charges. This is Money
For their retirement savings, Sarah’s employer should offer a scheme – all employers must do so. She should join and consider making additional payments.
This might be the same for Leon, but if he is self-employed a monthly payment into a personal pension could be invested in a medium to higher risk fund.
As he has around 30 years to save, we would recommend a low-cost index tracking fund with access to worldwide growth in shares and fixed interest investments (corporate and government bonds).
To give Leon an idea of where he might invest, LEBC’s Growth Index Pension portfolio, which is higher risk than the Balanced Growth one, is below.
Both Sarah and Leon will benefit from tax relief from the Government on their savings for retirement, with every £8 they put into a pension topped up to £10.
|HSBC European Index||4.50%||0.07%|
|iShares Corporate Bond Index||2.50%||0.16%|
|iShares Global Property Securities||5.00%||0.22%|
|iShares Pacific Ex Japan Equity Index||4.50%||0.18%|
|iShares UK Equity Index||17.50%||0.06%|
|L&G International Index||17.50%||0.13%|
|L&G Short Dated Corporate Bond Index||5.00%||0.14%|
|L&G UK Index||17.50%||0.10%|
|L&G US Index||12.50%||0.10%|
|Vanguard Emerging Markets Stock Index||9.00%||0.27%|
|Vanguard Japan Stock Index||4.50%||0.23%|
The information provided by our expert is for the purposes of this article and is not personal advice.
If you are at all unsure of the suitability of an investment for your circumstances please seek advice.
Nothing in this response constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
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