Awarhola's list of (many) questions

[Awarhola]

Hi everyone. I've been reading the (great!) journal entries by other forum members. I thought I'd post a message to see if I can tap into the wisdom of the forum on my current issues. I'm also hoping that writing this post will help me think things through.

So, I'm male, early 40s. My work is split between part-time employment and self-employment. I am married, have one child and live in the UK.

I currently own a large home, with a mortgage of £130k and a value of around £270k. I have £18k in savings. We're overpaying our mortgage by £275 per month, saving £100 per month into a fund and £100 per month into a fund for our child.

Current issues:

1.
I've not been contributing to a pension for five years. My part-time employer has been adding 3% to a scheme. Since I went self-employed, all of my income from that has gone towards home improvements on our new home/clearing a loan on a small (used) car. Before I was self-employed, I worked for 10 years with organisations who made good contributions to final salary schemes.

So, starting to take some form of action on my retirement is key.

2.
Debt. I have £3.5k in unsecured debt. Most of this is on an interest free credit card. The remainder is in a current account at 18.9% annually. I am about to switch current account that costs 15%.

The debt has been created by not holding back some of my self-employment income to pay for business expenses (about £1k p/a).

The debt is annoying me - I want it to disappear. The main action here is to clear it, and then stop creating more debt - by holding back a higher percentage of the income for taxes and expenses.

3.
Our home is large enough to convert a space to create an extra bedroom. This work will cost £20k. I've done research with a few local landlords, and this combined with looking at online listings makes me confident that we could rent this potential new bedroom for between £400-£600 per month.

It would cost £400 per month to borrow the money to do the work (if paid over five years).

We could use some of the savings to bring the loan to do the work down to c£5k.

Another alternative to generating income/reducing costs could be to build our savings up to clear a mortgage account of £27k. That would free up £200 p/m in payments and potentially the £275 per month current over payment too. This last option sound more attractive to me in the short term, as we're not increasing our debt.

4.
Another thought to solve all of the above would be to downsize to an apartment (which both of us are happy to do). We'd buy this for around £150k (so we could almost be mortgage free). Then the serious saving could begin.

A footnote: my self-employment work brings in more than my employment job, so should the right contract come my way, I am very likely to go fully self employed shortly.

Phew, that was a lot to get off my plate.

So, if you have got this far (many thanks), if you were in my shoes, what would you do about the combination of issues above?

Any thoughts at all would be very welcome,

Yours, Confused And With Too Many Options (!), Awarhola.

[Awarhola]

Hi ffj. Thanks for your reply. Moving is not certain, just an option at the moment. The overpayment for the mortgage is a joint debt we are paying down, whereas the current account/credit card debt is mine to resolve (not a joint debt). 130k is the remaining balance left on the mortgage.

Yes, it does sound like more debt might be a bad idea. I was a landlord for 7 years a while ago, which worked well, but I've not sub-letted before. Why only £18k in the bank, I guess all of the standard reasons (not saving enough/spending too much) - buying houses, doing them up, having a kid, going on holiday. In terms of the existing pensions, they will still pay out on retirement. I'm a huge fan of this site - which is why we're considering the downsize option too.

Hope these answers help a bit, many thanks for your time, Awarhola.

[saving-10-years]

@Awarhola. Welcome to the forums and thanks for posting.

A bit like @ffj I feel that you are perhaps jumping straight into trying to make a decision about big hypotheticals but you don't say much about the small stuff. Have you looked at your saving rates and spending? Yes its the standard stuff and might be a bit boring, but its a very good place to start. Gets things on stable ground and makes sure you can spot things you can do without adding extra debt. Keeping paying interest on a credit card does not sound like a good idea, shouldn't that be paid off pronto? As you are jointly buying the house perhaps the household budget is under someone else's management/co-management and these plans might be about what they value?

I am intrigued (being in the UK) that you were a landlord some time ago and were not sub-letting then. Did you own that property outright? As your property now has a mortgage (its been a long while since I had a mortgage so forgive this if a daft question) will the lender be okay with you doing substantial work to create an extra bedroom? It sounds structural work to me (£20k sounds a lot of money) so are you talking loft conversion, self-contained annexe or something? You say it will cost £400pm to pay off the loan over 5 years but only generate £0 to £200 per month (assuming you have an occupant and they always pay up). You may well find that you have much more than that amount which you can pare off your household spending a month. Its less risky IMHO to start there. Also mortgage interest rates are still very low and I presume that £400 per month could rise.

@ffj That would be one reason why I would overpay mortgage as UK mortgages even with fixed rates are generally fixed for only a short time. (But agree that paying mortgage is not a priority over credit cards at ouch-y interest rates).

[Awarhola]

Hi saving 10 years, thanks for the message. We do track spending closely (excel sheet), but have not looked at our savings %. We'll start to do that. It does sound like sub-letting may be a no-go, and we should focus on clearing debts/driving up our savings rate. Thanks for your help.

[saving-10-years]

Just also meant to say that compared to the rates of savings of most people in the UK who are your age you are pretty good. However as you will have gathered if you have read the blog and book by @Jacob (recommended), or the journals here, there are some amazing savings rates possible.

The term 'anti-fragility' also comes up here. Think of it as not putting all your investment eggs in one basket (in this cases this is also your home). I'm old enough to recall interest base rates of 15%. See http://www.propertyinvestmentproject.co ... ory-graph/

As DH worked for a bank at this time we had a mortgage cap of 5% no matter what the Bank of England rate was. Not sure whether banks still offer this sort of protection for employees with mortgages. For us it was very reassuring.

[Awarhola]

Thanks @saving-10-years. I know - the forum saving rates are impressive! Yes, I'm also keen to keep our mortgage rate under control - we're using fixed rate deals, but of course, they could rise when we switch. Best wishes, Awarhola.

[Awarhola]

Hi @saving-10-years. I've had a quick look at our savings rate projections for this year - an average of 16% per month of net income. I forgot when I wrote the first post to add in an additional saving amount of £100 per month into another fund. If we were to clear the smaller mortgage debt account and keep saving the amount we were paying, that could rise to 22% average per month. AWarhola.