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Nick and Kathryn Knight
Ages: 35 and 33
Live: in Fareham, Hampshire
Occupations: Tax adviser, human resources worker
Earn: ?31,000 plus flexible benefits worth ?1,500,
?28,300 plus flexible benefits worth ?1,500
Mortgages: ?49,000, ?71,000 and ?62,500
Debts: ?2,500 one-year personal loan
Investments: Tessas, Peps, Isas
Pensions: Several small company schemes
Aim: To buy a holiday home in Cornwall
Nick Knight's friends can't believe he has only just climbed out of negative equity on the flat he bought in 1989, but he explains: 'It is not in a fashionable part of London and studio flats don't sell very well.'
He bought at the peak of the market for £55,500. At one stage its value dropped below £20,000 but it was recently valued at £53,000.
'I thought the boom was going to carry on and I had to get into the property market. I stretched myself a bit, and the rest is history.'
The flat has been let since 1992. Nick is now married to Kathryn and they have a 15-month-old daughter, Juliet. He has acquired two more mortgages. The flat's current tenant is a long-stay Department of Social Security claimant, who now pays less rent than agreed originally. Nick loses £100 a year on the letting, but says: 'He cannot afford to make up the difference so I told him not to worry because he looks after the flat well.'
Now he is out of negative equity, Nick is not sure what to do: 'Part of me feels it is good to have property in London so I should hold on to it, although another part of me worries about another crash.' He 'fell in love with' Cornwall during childhood holidays, and is tempted to keep the flat until the mortgage is paid off in 2014 and use the capital to buy a second home there. Then 'the proverbial albatross around my neck would end up doing some good'.
Nick and Kathryn both work full time and pay about £600 a month in nursery fees. Both have flexible benefits packages and take much of them in nursery vouchers at a 6 per cent discount. Nick also takes Tesco vouchers but not a company car 'because that is quite expensive in tax terms'.
Both have medical benefit, and Kathryn wants to buy extra holiday. Because of career changes, their pensions are small, but they are building these up and hope to put more in from next May when a loan to build their conservatory finishes.
Savings are 'around £1,000'. Both have Portman Tessas which mature in March 2004: 'We will probably use that money to buy a new car.' Their Peps and Isas were worth about £1,500 but have now lost value.
Adviser 1: Donna Bradshaw
Letting a flat can have drawbacks and if the
Knights sell to avoid these, they will receive the
entire proceeds of the endowment when it
matures.
They are light on life cover. If Nick or Kathryn
died soon it is unlikely their pensions would
provide sufficient benefits for the family. They
should work out how much income they need
compared with what they would receive. Term
insurance for a lump sum, or family income
benefit for a regular income, for both of them can
make up the shortfall. They should put the ?1,000
in a mini-cash Isa.
For his age Nick is putting the right amount into
pensions, though it might be better to build up
short-term savings instead. Remortgaging in
October 2002 could save a considerable amount,
perhaps with a current account mortgage where
you can pay off additional capital.
If they have no critical illness insurance and are
non-smokers in good health, the cheapest
mortgage protection plan for ?132,000 over 20
years, including this cover, costs ?38 a month with
Norwich Union.
The annual management charge of 1 per cent for
their Direct Line FTSE 100 tracker fund is high. I
recommend a FTSE All-Share tracker rather than
one which tracks the FTSE 100. Legal and
General's annual charge is 0.5 per cent.
Donna Bradshaw works for Fiona Price & Partners.
Adviser 2: James Dalby
After such a long haul Nick is right to consider
keeping the flat as a long-term investment,
although it is now reasonable to expect the rate
of increase in residential property prices to slow
down.
The Knights might find the decision easier if they
ask themselves whether they would buy the same
property today for investment.
Selling the flat now would enable them to repay
its mortgage and release capital which they could
use to cut their main mortgage, but boosting their
cash on deposit would be better.
They should have more than their ?1,000 savings
as an emergency fund. Scottish Widows Instant
Transfer pays 4.65 per cent.
Nick should boost his life insurance, comparing
the cost through his flexible benefits package
with a quote from an independent financial
adviser.
But it makes sense for him to split his money
between pensions and Isas. Both have their
merits, and using both maximises flexibility. An
Isa fund to consider is Fidelity Wealthbuilder
which provides global exposure to equities
through Fidelity's regional specialists.
When the loan is repaid, they could boost their
cash deposit and again split spare money
between ISAs and pensions.
James Dalby works for Bates Investment Services.
· Advice is for guidance only. Do you want to appear in Wealthcheck? Write,
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investments, to: Wealthcheck, The Observer, 119
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