Finances 1st Quarter Review

Cotta

Hi All,

I'm following on from a thread of mine before Christmas, I've made some changes based on advice and my position is now a little better (still lots of problems) so I was interested in some further advice.

My setup is as follows:

Outgoings

Mortgage - £393 p/m at 4.69% (Balance is around £66k) renewal due on February 2017. 10% overpayments allowed and there is a 5% fine for early settlement.

House Rates/Tax - £200 p/m
Car Insurance - £45 p/m
House Insurance - £17 p/m
Mobile - £28 p/m contract includes paying off phone.
BT Landline £26.69 (This is my parents but I pay this)
Virgin Media Broadband - £16.25
Gym - £16 p/m
Fuel - £100 p/m
Heating Oil - £30 p/m
Electric - £20 p/m
Food - £80 p/m

Savings

£2000 (in a current account)

Debt

Mortgage - £66k
Loan from parents - £7000
Student Loan - £1800

Notes

My net monthly income is £1750.


I contribute 8% of my salary towards my pension.

chockydavid1983

What is your mortgage currently? Did you remortgage in February?

Linton

Adding up your expenses I get a total of £972 which is a little over half your income. What s your problem? What do you want advice about?

Cotta

chockydavid1983 wrote: »

What is your mortgage currently? Did you remortgage in February?

66k at 4.67% with 23 months left of a five year term.

Linton wrote: »

Adding up your expenses I get a total of £972 which is a little over half your income. What s your problem? What do you want advice about?

Partially I have no savings/investment and only 2k of an emergency fund - what should I do?

chockydavid1983

Linton wrote: »

Adding up your expenses I get a total of £972 which is a little over half your income. What s your problem? What do you want advice about?

This. Where is the rest of the money going? You should have quite a bit spare each month with the figures you've given.

Cotta

chockydavid1983 wrote: »

This. Where is the rest of the money going? You should have quite a bit spare each month with the figures you've given.

I had a few smaller debts that have now been paid off and I also made some overpayments on my mortgage.

Linton

Cotta wrote: »

I have no savings/investment and only 2k of an emergency fund - what should I do?

The emergency fund is a problem. You need to be able to deal with an expensive house or car problem or the loss of your job without any risk of getting into debt. If the expenditure figures are correct I suggest you put a few hundred pounds/month into your savings until you have £4-£5K saved. Are your savings in a higher rate interest account?

It also looks sensible to overpay your mortgage within the allowed limit. The effective return of 4.69% on money spent this way is pretty good. Better than you can expect to get from savings.

chockydavid1983

In your position, I would be putting more aside into an emergency fund before making any more mortgage overpayments.
Once you have a bit more of a safety net, then I'd think about mortgage overpayments, investments and pensions.
If overpaying mortgage by x per month could lead to you lowering your LTV when you do eventually come to remortgage again then that could be a good idea. Also, your mortgage rate is quite higher so harder to beat with investments for some people.
If not already, I would pay in at least the minimum to pension to get the maximum employer contribution. You'd have to do some calculations (online ones available) to work out if the amount you're putting by is likely to be sufficient in retirement. Also, if you're a higher rate tax payer, pension beats S&S ISA if you won't need access to the money.
S&S ISA is more flexible in terms of the age at which you can access it.

Cotta

I currently only have three bank accounts:


1. Halifax Reward
2. Nationwide Flex - I just switched to this for the £100 reward.
3. Danske current account - This is completely dormant.

bowlhead99

Cotta wrote: »

66k at 4.67% with 23 months left of a five year term.

A 10% fee for early settlement is pretty high. If that's the case there is no point paying the fee and remortgaging the lot onto a better rate, because you wouldn't get a rate low enough to make the 10% back via a better rate over the next two or three years before the penalty goes away anyway.

However, at 4.67% it is a compelling case to overpay within the limits if there were no higher paying accounts available and you didn't need to pad your emergency fund.

Is the "10% overpayments allowed" a reference to 10% of the remaining balance can be paid early each year (£6600 this year allows you to do an extra £550 a month)? Or they allow you to overpay your monthly £393 by 10% each month (£40 a month)?

Hopefully the former so you have plenty of capacity to overpay. However, you also have plenty of capacity to save at high interest rates (Nationwide flexclusive regular saver is 5% on up to £500 a month and has instant access.

The poster above is right that paying the mortgage down so you can get a better "loan to value" when you remortgage is valuable. But you don't need to actually overpay the mortgage now to do that. Having a big cash stash on hand when the reportage happens allows you to clear the debt down to a lower LTV (once the penalty no longer applies) so has the same end effect while giving you more short term flexibility.

So, you have two decent options anyway. No point looking at investments which carry investment risk etc. The potential extra returns over and above the risk free rate of 4.7 to 5% are not worth taking investment risks for when you don't have a decent emergency fund and you have an extensive mortgage.

Also, as you are not a higher rate taxpayer, pension is not particularly compelling unless you are not currently contributing enough to get the maximum contribution from your employer. You haven't mentioned that as an option so I'm assuming you are already doing that (i.e. making as big a contribution as is required to get the maximum from the employer). If you are not, be aware you are turning down free money if the employer offers it but you don't take them up on it.

I have no savings/investment and only 2k of an emergency fund - what should I do?

If the poster above added up all your basic bills and got about £970 and you have £1750 net income you can do some serious saving. However, you didn't include any money for going out, socialising and other things that aren't fixed commitments but are still needed by most of us to function in society like buying clothes and shoes when they are wearing out. So let's say you are spending £280 on that sort of stuff and then you have a nice neat £500 left to save.

Priority one, emergency fund. Build it up in a regular saver account at £400pm. Interest will be tax free within your personal savings allowance. At the end of the year when the account automatically expires you will have almost £5k which when added to the £2k you already have will constitute an emergency fund of 4 months net pay or 7 months bills. Move it to a high interest current account at that point and don't blow out on trivial stuff.

The other 20% (£100pm) of the £500 "savings" you are making each month can be used to repay the bank of mum and dad over the next 7 years, assuming they are not looking for it any faster.

After a year you will have got your emergency fund in place and the new money you are saving each month can be saved at 5% again (if such offers still exist) or split between the highest interest savings accounts you can find and the mortgage at 4.67%.

Cotta

bowlhead99 wrote: »

A 10% fee for early settlement is pretty high. If that's the case there is no point paying the fee and remortgaging the lot onto a better rate, because you wouldn't get a rate low enough to make the 10% back via a better rate over the next two or three years before the penalty goes away anyway.

However, at 4.67% it is a compelling case to overpay within the limits if there were no higher paying accounts available and you didn't need to pad your emergency fund.

Is the "10% overpayments allowed" a reference to 10% of the remaining balance can be paid early each year (£6600 this year allows you to do an extra £550 a month)? Or they allow you to overpay your monthly £393 by 10% each month (£40 a month)?

Hopefully the former so you have plenty of capacity to overpay. However, you also have plenty of capacity to save at high interest rates (Nationwide flexclusive regular saver is 5% on up to £500 a month and has instant access.

The poster above is right that paying the mortgage down so you can get a better "loan to value" when you remortgage is valuable. But you don't need to actually overpay the mortgage now to do that. Having a big cash stash on hand when the reportage happens allows you to clear the debt down to a lower LTV (once the penalty no longer applies) so has the same end effect while giving you more short term flexibility.

So, you have two decent options anyway. No point looking at investments which carry investment risk etc. The potential extra returns over and above the risk free rate of 4.7 to 5% are not worth taking investment risks for when you don't have a decent emergency fund and you have an extensive mortgage.

Also, as you are not a higher rate taxpayer, pension is not particularly compelling unless you are not currently contributing enough to get the maximum contribution from your employer. You haven't mentioned that as an option so I'm assuming you are already doing that (i.e. making as big a contribution as is required to get the maximum from the employer). If you are not, be aware you are turning down free money if the employer offers it but you don't take them up on it.



If the poster above added up all your basic bills and got about £970 and you have £1750 net income you can do some serious saving. However, you didn't include any money for going out, socialising and other things that aren't fixed commitments but are still needed by most of us to function in society like buying clothes and shoes when they are wearing out. So let's say you are spending £280 on that sort of stuff and then you have a nice neat £500 left to save.

Priority one, emergency fund. Build it up in a regular saver account at £400pm. Interest will be tax free within your personal savings allowance. At the end of the year when the account automatically expires you will have almost £5k which when added to the £2k you already have will constitute an emergency fund of 4 months net pay or 7 months bills. Move it to a high interest current account at that point and don't blow out on trivial stuff.

The other 20% (£100pm) of the £500 "savings" you are making each month can be used to repay the bank of mum and dad over the next 7 years, assuming they are not looking for it any faster.

After a year you will have got your emergency fund in place and the new money you are saving each month can be saved at 5% again (if such offers still exist) or split between the highest interest savings accounts you can find and the mortgage at 4.67%.

Slight typo, early re-settlement figure is 5%.


My pension contribution of 8% results in the employer paying 11.5%.