A yen to mess around with boats

John is separated from his wife and is thinking about living on a boat. He writes:

'It all started from a conversation in a pub. When my wife and I separated two years ago, we decided not to divorce as she would lose all rights to the Teachers' widow's pension. Instead we agreed that I should retain my teacher's pension while she kept the marital home, mortgage paid. This is still in our joint names but I am planning to sign it over to her.

Currently I am renting a house for £325 a month. I am fortunate because I pay a relatively low rent for a decent two-bedroom Victorian house. But the cheap rent has put me in a comfort zone. I am reluctant to take on a mortgage and, because of my salary and age, 51, I could not afford to buy anything comparable to this as a mortgage would have to be paid off when I retire in 10 years' time.

I would be in effect be a first-time buyer but I feel almost excluded from the housing market.

Then I got talking to friends in a pub who have lived on a narrow boat for seven years. They have now bought a house and want to sell the boat for about £35,000. I could make it my home with the bonus that holidays would be wherever I wanted to go.

I am not specially tidy but I am prepared to make changes to fit life on the water. I have relations who own boats and have asked them to give me the negative side. I could raise £6,000 to £7,000 but I would have to borrow the balance of about £28,000.

I already owe £12,500 on a five-year fixed-term loan with Tesco and have about £400 debt on my credit card. I have little money to play with but I hope to be debt free and have more disposable income in four to five years' time when our youngest child finishes university.

I have £700 in a cash Isa and an endowment policy with Winterthur which costs only £12 a month but has produced zero bonuses for at least two years. The current surrender value is around £6,000. I also have a tax-free plan with Teachers Assurance which costs £25 a month and is worth £1,000 if I cash it in. My pension will provide me with a half salary and a lump sum on retirement.

Should I take on a mortgage, cash in policies and reduce debts or consider my other options? My natural tendency is to be complacent and drift.'

Forget the romance and think ahead

You need to be sure that your preference for taking the easy route does not lead to problems later on. While you are both satisfied with the financial arrangement at the moment, either of your circumstances, personal and financial, could change.

Joanne Cox, an independent adviser with Co-operative Bank Financial Advisers, warns: 'While John may feel he is doing the best for his family by handing over the family home and even having his name removed from the deeds, he should take advice from a solicitor to establish just what his options and responsibilities are.

'If, later on, his estranged wife became unable to cope financially, John may find himself without a home yet providing maintenance, either on a voluntary or compulsory basis. It will be much more difficult for him to renegotiate terms if his name is not on the deeds of the house.'

You do not have to take a solicitor's advice but at least you will be better informed about deciding what to do: 'Private arrangements, however well intentioned, can sometimes cause more tension and discord over time than formal arrangements which ensure everyone knows where they stand,' says Cox.

At 51, living on a boat might sound practical and even romantic. But you must think ahead. Will you still be able to cope with cramped conditions when you are 61 or 71? Finding accommodation on land then will be even more difficult, says Cox: 'If John feels he is almost excluded from the property market now, he certainly will be in 10 years' time.'

To help with the cost of a mortgage, you could buy a house for yourself large enough to take in a lodger and charge up to ?81.73 a week, ?4,250 a year, without paying tax under the Government Rent-a-Room scheme. This would help pay the mortgage.

Or, if you prefer not to share, you could stay put and buy a property to rent out. As house prices have stopped rising, you need to choose carefully. For a buy-to-let mortgage, you'll probably need a 20 per cent deposit but can borrow 100 per cent for a traditional home loan.

Cox advises: 'If John needed a deposit, he could consider surrendering his savings plans, but understand that he would also lose the life insurance cover. Before doing this he should take advice and take into account the remaining term of the policies, premiums paid to date, penalties and projected maturity.'

She adds: 'Some lenders might take the existing prop erty into consideration as security if John's name remained on the deeds and his estranged wife agreed.'

Owning a boat is different from owning a house as it depreciates in value, yet still has expensive outgoings with insurance, mooring fees and regular expensive maintenance. You will probably pay council tax, depending on the local authority.

But if, despite learning the downsides, you really do want to become a 'liveaboard', thoroughly research the subject, starting with the Residential Boat Owners Association (www.rboa.co.uk) and National Association of Boat Owners (www.nabo.org.uk).

Cox suggests a trial period: 'Could John rent the boat for a couple of months to see how he likes life on the water once that holiday feeling has worn off?'

Even though you would be buying from friends, get the boat surveyed and compare the price, as a cheaper boat might suit you just as well.

Few lenders give marine mortgages - loans using a boat as security. One is RoyScot Larch, a subsidiary of Royal Bank of Scotland (www.royscotlarch.co.uk) where you can borrow up to 80 per cent of the cost. The interest rate on ?28,000 is 9.9 per cent APR and the loan over 10 years would cost ?362 a month.

At Barclays Marine Finance (www.barclays.co.uk) you can borrow 90 per cent secured on the boat at 8.3 per cent APR. You can increase repayments, without penalty, when you have more money to spare.

Both these are more expensive than a cheap unsecured personal loan, which at Tesco costs 6.5 per cent APR although the maximum you can borrow is ?25,000. Over 10 years, that costs ?282 a month.

While you are thinking, keep reducing your credit card bill and put any money you can spare in the cash Isa.

John's to-do list

1. Check with a solicitor the financial agreement with your wife.

2. Investigate the costs of owning a boat.

3. Consider a buy-to-let.

4. Continue reducing your credit card debt.

5. Keep saving in a cash Isa.

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