PERSONAL FINANCE: WEALTH CHECK: Home Truth for a Man with Debts ; When You Owe a Few Thousand and the Value of Your Home Has Shot Up from Pounds 42,000 to Pounds 170,000, the Option to Cash in and Pay the Creditors Is Tempting
Chu, Ben, The Independent (London, England)
Steve Clarke says if he had to describe what he does it would be working with vulnerable adults. Mr Clarke, 28, has been working with homeless people, alcoholics and drug addicts since 1995. Brought up in Denton, Manchester, he went on to study behavioural sciences at Huddersfield University. The course covered sociology, psychology and philosophy. "It's what inspired me to do volunteer work," he says. "I came to London since there's actually far more opportunities in this field than in Manchester."
After leaving university in 1995, he became a volunteer with homeless charities and social organisations. Last year he spent time working for a mental health organisation in New York. "The work can be stressful, but I do enjoy it," he says.
In a few months Mr Clarke will be starting a management post with a housing organisation that helps people with drug and alcohol problems to find accommodation. He will head a team of eight. He wants the job because it pays more and he wants to pay off some debts.
Mr Clarke owns a two-bedroom flat in Brixton, south London which he bought for pounds 42,000 in 1998. "It's not in a nice area but I can put up with it," he says. He is also pleased to find it could be worth as much as pounds 170,000 now. "I've not done much work on the flat," he says. "I'd like to put in a new kitchen and bathroom." He is also well placed for his new job; he plans to walk the short distance to Denmark Hill every morning. He will save on costs of travelling to Shepherd's Bush in west London every day. He rents out the spare room to a friend for pounds 300 a month.
He has a 25-year endowment mortgage on the flat. He pays pounds 230 in interest payments a month to the Woolwich building society, on a fixed rate of 6.2 per cent. He also pays pounds 62 a month to Friends Provident to cover the endowment. Mr Clarke has been warned there will be a shortfall on the endowment of pounds 8,000, assuming growth stays at approximately 6 per cent until maturity. If he were to cash it in now, it would be worth pounds 1,556.
"My long-term plans are to pay of my mortgage as quickly as possible and to start saving," he says. "I'm tempted to capitalise on my positive equity and pay off my debts. I'm also considering what to do with my endowment policy, whether it's better to cash it in." He would incur penalties of pounds 2,000 for changing his mortgage.
Finally, Mr Clarke would like to know if it is worth selling his flat and taking his money out of the housing market. We put his case to Darius McDermott, of Chelsea Financial Services, Bhupinder Anand, of Anand Associates, Glyn Hall, of Beckett Financial Services and Colin Jackson of Baronworth.
`Stay put, remortgage for a better deal and start savings plan'
Solution 1: Mortgage
Mr Jackson believes Mr Clarke's fixed-rate mortgage of 6.2 per cent is high. He should shop around to see what better rate he could get and then work out whether it is worth paying the pounds 2,000 penalty.
Mr McDermott suggests Mr Clarke remortgage with National Counties Building Society, who are offering 4.19 per cent for five years. He would be able to release sufficient equity to cover the costs of a kitchen and bathroom and to pay his debts to his parents, overdraft and housing cost. This would enable him to take an extra pounds 20,000 out of his property and still have lower monthly outgoings.
Solution 2: Endowment
Mr Jackson advises Mr Clarke to let his endowment policy run its full term to get the terminal bonus. If he does not wish to do this, before cashing it in he should investigate the possibility of selling it. To get the best price he should approach a trawling company who will go to most players in the traded endowment market for him. As for the shortfall, Mr Jackson suggests Mr Clarke could convert part of his mortgage to capital and interest. …