Sarah and Leon: we want & # 39; forever & # 39; buy house in five years
In our Money Pit Stop series, we ask an investment expert to give readers of This is Money a free portfolio makeover.
Sarah and Leon, from Merthyr Tydfil in Wales, want their & # 39; for ever & # 39; to buy a house and to retire in 30 years on a good income.
Sarah, 35, is financial controller, while Leon, 32, was previously in the army, but just started as a plumber.
The couple already own a house plus a rental object.
They have £ 60,000 in bank accounts and can save around £ 500 in the future, but are at the crossroads of what they can do with their funds.
They consider buying another property and are doing it to resell and make a profit.
But they also wonder whether they should set up a risky investment portfolio – avoiding everything that involves high risk, such as Bitcoin – in order to achieve their goals.
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Sarah and Leon's saving and investing
Risk appetite: Average
Time horizon: five years to buy an eternal house and 30 years to stop with a good annual income
Investment funds and ETFs: none
Cash: £ 60,000, but they want to keep around £ 10,000 in the bank & # 39; for the case & # 39; and spend on a van for Leon's work, leaving them £ 50,000 for their long-term goals
Properties: Home they bought for £ 85,000, now worth around £ 100,000, which has a mortgage of £ 65,000. They bought rental homes for £ 70,000, now £ 80,000, with a mortgage of £ 48,000. The rental income is £ 450 per month
Premium bonds: None
Kay Ingram, financial planner at the independent financial advisor group LEBC, writes: Sarah and Leon did well to own their own house and bought a building in the early thirties to rent out.
Leon's sanitation skills could help them to climb the house ladder through renovation work, but they need to think carefully before starting a new buy-to-let purchase, as their previous success might not be easily repeated.
One of their ambitions to own their home in the next five years means that they might or should stay home earlier and diversify their savings.
It is wise to mark retirement savings as their other goal. If they put aside part of their surplus now, they will have more choices about their pension and the lifestyle they can enjoy.
Do Sarah and Leon have to buy another house?
Buying another smaller property to renovate and rent does not maximize their ownership value, as house prices in their part of the country, Merthyr Tydfil, slow down.
According to Zoopla, average prices have dropped by 1 percent in 12 months. As existing homeowners they would pay 3 percent stamp duty for every new purchase that is not their main home, adding £ 2,523 to the cost of the average terraced house in their area.
Kay Ingram: "Diversifying their savings in areas other than real estate can be less risky than stacking everything in bricks and mortar."
The rental yield of their current buy-to-let property is 3.12 percent before tax, 2.49 percent after deduction of taxes. If they had an idle period, without income, the mortgage must still be paid.
Owning three properties, all in the same price range and location, makes this a risky strategy if the market continues to slow down.
Their renovation skills can be better used if they move to another larger building that would be their home at the same time. This saves stamp duty and would result in a larger money gain.
They would be inconvenienced when buying their own home, but this would give them a larger property to sell in the longer term. Without increasing their current loans, they could buy around £ 185,000.
They can move again for their dream home, but doing this in two steps is probably more feasible. If by then Leon is more established in his job or company, they will also have more borrowing capacity.
How can they put their finances on a firmer basis?
If Sarah and Leon do not want to move now, diversifying their savings in areas other than property can be less risky than stacking everything in bricks and mortar.
As the first to strengthen their financial base, they should take the following steps:
* Spend three months of money, say £ 8,000, on an easily accessible savings account;
* Get life insurance if they have not already done so – it must cover both mortgages and leave an excess of capital for the survivor;
* Disease sick pay review – Sarah should receive legal sick pay (£ 92.05 per week for 28 weeks) but if Leon is self-employed, he may need insurance to protect his pay in the event of an accident or illness.
They bought their home on a loan worth 76 percent. The growth in house prices means that they are now 65 percent due, so a new mortgage can yield savings.
Assuming there are no applicable fines, paying £ 15,000 will reduce this to 50 percent and save more. Re-mortgaging at a fixed interest rate would stabilize their expenses and give them known costs as interest rates begin to rise.
A settlement amount of £ 1,000 is typical of such mortgages. Based on a 50 percent loan to value, fixed five-year rates are available at just 1.83 percent over the deal period, according to This is Money's mortgage searcher, after which the rate will rise.
How can Sarah and Leon invest for their future?
Once they have taken the above steps, the remaining £ 33,000 of the pair can be invested in two shares and Isas shares.
Adults can contribute up to £ 20,000 per year – so that's £ 40,000 between both in the current fiscal year – and these savings are free from both income tax and capital gains.
Sarah and Leon would have a five-year vision and are prepared to take an average risk. Many financial service providers and advisors create model portfolios that are designed for this level of risk and that enable growth during this period.
Llwyn-on-reservoir near Merthyr Tydfil: Sarah and Leon live in a beautiful part of Wales, but house prices in the region have dropped by 1 percent in 12 months and it may be a risk to buy a third home there
These are available everywhere, but for illustration purposes, LEBC's own Balanced Growth Isa portfolio is shown below. We select and evaluate the funds, but they are invested with a large number of fund managers, completely independent from LEBC and selected from across the market.
We also outsource our research to an independent third party research agency for which we pay, 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 & # 39; ongoing charge figure & # 39;
The ongoing costs are the standard measure for the current costs of the fund. The bigger it is, the more expensive the fund has to be.
The ongoing charges figure can be found in the Key Investor Information (KIID) for each fund, usually at the top of page two.
To locate these documents, put the name of the fund and & # 39; EBI & # 39; together in an internet search engine. Read more about investment costs here. This is money
For their pension savings, Sarah's employer should offer a scheme – all employers must do so. She must participate and consider making additional payments.
This may be the same for Leon, but if he works as a self-employed person, a monthly payment can be invested in a personal pension in a fund with a medium to higher risk.
Since he needs around 30 years to save, we would recommend a low-cost index tracking fund with access to global equity and fixed income (corporate and government bond) growth.
To give Leon an idea of where he could invest, LEBC's Growth Index pension portfolio, which represents a higher risk than the Balanced Growth portfolio, is lower.
Both Sarah and Leon will benefit from tax relief from the government on their savings for their retirement, with every £ 8 they deposit into a pension that is repaid 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 Stock Index||4.50%||0.18%|
|iShares UK Equity Index||17.50%||0.06%|
|L & G International Index||17.50%||0.13%|
|L & G short-term corporate bond index||5.00%||0.14%|
|L & G UK index||17.50%||0.10%|
|L & G US index||12.50%||0.10%|
|Stock index of Vanguard Emerging Markets||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 not at all sure whether an investment is suitable for your circumstances, ask for advice.
Nothing in this answer constitutes regulated financial advice. Published questions are sometimes edited for brevity or for other reasons.
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