Savings vs Investments.......

Dom1980

Hi, I'm and 31 years old. I have 5 years of a company pension final salary pension, and since being Ltd company in 2008 pay £400 a month into a private pension with St James Place.

I have a plan in place to be mortgage free by the time I'm 40 on my non-buy-to-let properties. I have 4 properties. Two buy-to-lets and two repayment.

Property 1. Est. Value = £230k. Mortgage = £160k
Property 2. Est. Value = £200k. Mortgage = £120k
Property 3. Est. Value = £80k. Mortgage = £52k (BTL / Interest only)
Property 4. Est. Value = £72k. Mortgage = £47k (BTL / Interest only)

I make no profit on any property via rent, my divorced inlaws are in the BTL's and my parents in property 1.

The plan is to sell property 1 in a couple of years time and buy a property for £50k less than the sale price.

I have approx. £50k in savings which I keep as contingency as I am a contractor.

I have spoken to numerous specialist financial advisors who with the exception of looking for better mortgage deals, have very little advice to give in the way of retirement planning. I'd like to retire at 55 if possible.

Any advice is welcome, particulary how I can take make money out of property one (no rental income but no mortgage planned) - I can't make my parents homeless.

Both my in-laws plan to move in with new partners over the next few years so both BTL's should provide a small rental income. Should I switch these to repayment as opposed to interest only?

After October 2012, I will have no debt other than mortgages.

I would also like to start considering plans for future childrens, uni fees / house deposits too.

I appreciate I am lucky to be in the situation I'm in, and would like help refining my plans further.

princeofpounds

What you are asking is a fantastically open-ended question.

Your net worth in property, assuming you valuations are correct, is about £200k. That's enough to own property 2, all the rest you are basically borrowing money to gamble on house prices as you make no net operating income from the properties (ok, so property 1 is a slightly different situation but I'll leave that aside for now).

Your loan-to-value is about 65%. That means that for every 1% property prices go up or down, you will gain or lose almost 3% of your net worth. Plus the ongoing cost of the debt, although you appear to be offsetting that with rent at current interest rates.

There is no right or wrong answer to that risk profile, it depends on your personal preferences and beliefs about the future of your investments. But I would point out that it is not diversified, and you should understand the stress-test of property prices dropping 30% and interest rates rising 5% (or pick whichever numbers you like), which would wipe out 90% of your net worth and possibly leave you with sharply higher interest costs both due to higher rates AND a lower LTV.

If you decide to retain all the properties, you should consider looking at fixing long-term financing. You are lucky in that your LTV is sufficiently low that you are not in danger of negative equity in anything except a stress-test type scenario. However, given that your rent is only covering the interest costs at the moment you are in danger of not being able to meet the ongoing liability stream in a stress scenario and so you would be forced to liquidate at precisely the wrong moment. Long term financing is cheap at the moment, artificially so because the Bank of England is implicitly supporting bond prices and thus lowering yields, and so even though it costs more than short term debt the insurance policy is much cheaper than it 'should' be. Up to you whether you think it is worth it

As for retirement at 55, if you are happy living in a 200k house, that is already provided for (noting the risks you have taken above). You have 25 years of earnings ahead, and so if you very crudely assume that any investments for retirement simply keep pace with inflation then if you are happy to live on half your income and save the other half you could fund yourself until 80, a bit shorter than is desirable. But given that you would probably spend a bit less when old and that you might be able to generate real returns then you are probably just about on track depending on how you behave from now on. That's a really unsophisticated way of looking at it.

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