Property News

Robert and John have already bought their houses, so Trevor has only Andrew to worry about. Andrew won’t need the house until he has finished university (he hopes to study engineering) in around five years’ time. Trevor already has the £10,000 sitting in a cash account for him, and Andrew also has a £16,000 inheritance in a cash account in his own name, which he will also put towards the deposit.

Trevor is worried because although £26,000 is enough for a deposit on a home now, he knows property prices are rising fast while the real value of cash is declining. He wants Andrew to be in the same position as his brothers when he reaches his early 20s.

Trevor thinks Andrew will be most likely to live in Gloucestershire after university, near the rest of the family. Because he wants to be an engineer – working in Formula 1 would be his dream job – it is unlikely he’d be tied to London where property prices are much higher.

Trevor has also thought about remortgaging his own house and buying-to-let now, with the aim of giving Andrew the property. But his biggest fear with having a mortgage again is that if he died unexpectedly, Dawn might not be able to afford to keep it going on just her salary.

Alison Treharne, a chartered financial planner at Shore Financial Planning, said: I can see why Trevor doesn’t want to stick with cash. As rates are so low they are unlikely to keep pace with inflation – let alone house price inflation – meaning he’d have to stump up more capital.

The other route he could consider is investing – but this would mean taking some risk with his money.

You can’t hold investments such as funds and shares in a minor’s name unless they are held in an investment Junior Isa, which is essentially a “wrapper” that protects the gains from tax. Trevor could put £4,000 into an Isa for Andrew in this tax year, and £4,080 next tax year from 6 April 2015, to give a total of £8,080. To protect the remaining £17,920 from tax, Trevor could use his own Isa allowance (£15,000 this year and £15,240 next year).

However, a word of caution on Junior Isas. As soon as the child turns 18 they are able to access the money – and there's a danger they might be tempted to spend it. I’m not saying Andrew would do this, but if Trevor prefers complete control of the capital, he could use up his own Isa allowances this year and next year, funnelling in £15,000 and then £11,000 next year to make a total of £26,000.

Trevor also has another savings option which would be very efficient. He could contribute to a personal pension and then take the money out for Andrew when he is ready to buy the house. Trevor can contribute up to £40,000 a year into a pension, attracting 40pc tax relief – as he is a higher-rate taxpayer. Currently he is only using £18,000 of this allowance, meaning he could put £22,000 more in per year.

New pension rules coming in on April 6 means that he can access this money fully after the age of 55 – in three years time. When the time comes to take the money out he can take 25pc of it as tax free cash, while the remaining 75pc will be added to his income and taxed accordingly. Trevor needs to ensure that his earnings plus the pension withdrawal in that year don’t exceed £150,000, or else he’ll set himself back by paying 45pc tax.

With £26,000 to invest over a five year time horizon, and aiming to achieve or beat 22.5pc, Trevor will need to choose a good selection of well diversified funds to put in his pension and/or Isas.

I’d put around 70pc of the money into equities, and the rest in commercial property and fixed interest funds to give a good spread (see my proposed holdings, left).

It would be a smart move to phase in the investments.

David Hollingworth of London & Country Mortgages said: I can see why Trevor wants to plan ahead as if he does nothing, Andrew’s capital will be eroded.

Using the £26,000 to fund a buy-to-let now is a possibility, but there are a number of sticking points.

To get a good deal on a buy-to-let mortgage he will generally need a 25pc deposit. There are some which allow buyers to invest with as little as a 10pc down payment, but generally the rates will be higher, reducing the overall returns.

So, unless Trevor has other money he could spend on a buy-to-let property, a £26,000 deposit could sensibly let him borrow £100,000.

To be honest, five years is a pretty short time frame to be thinking about owning a buy-to-let. This is because of the costs involved. He’ll face costs when he buys the property, including getting a valuation done, stamp duty, legal costs, survey costs and mortgage arrangement fees. He could expect all this to tot up to around £2,000. Then when he comes to sell the property there will be costs too. The estate agent fee alone could be 1.5pc of the house value, plus solicitor fees.

The best buy-to-let mortgage deal I could find for Trevor is a five year fix from the Post Office. The repayment rate is fixed at 3.89pc to 75pc loan-to-value (LTV) ratio. There’s a £995 fee and you get a free valuation. The monthly payment on a £100,000 interest-only mortgage would be £324.17. On a repayment mortgage it would be £817.73 a month.

Trevor and his wife could also consider remortgaging their family home to the value of £100,000 to allow them to purchase a buy-to-let property with a bigger deposit or outright. This could prove a cheaper option for them. Woolwich offers a five‑year fixed rate at 2.34pc where the borrower has a 40pc deposit. The fee is £999 and it also comes with a free valuation and legal work for remortgaging. On a £100,000 mortgage over 13 years the monthly payments would be £744.08 on a repayment basis, or £195 for interest-only.

If he’s worried about passing away and leaving unmanageable debt behind for Dawn, Trevor could buy some life assurance that’s tailored to cover the debt. Level-term assurance for £100,000 of cover over 10 years would cost around £19 a month for a 52-year-old non-smoker.

To Remortgage for Less, click here