‘Should we buy a house or start a business?’
This couple want security – but how can they achieve it? Olivia Rudgard reports
Married couple Veronica Ochoa and Jamie Watson have some big decisions to make. In their early 30s, both are high earners, although Ms Ochoa is temporarily out of work. They want the financial security that comes from owning either a home or their own business.
The couple, aged 32 and 33, live in London. Both are engineers. Mr Watson is a higher-rate taxpayer, and when in work Ms Ochoa has tended to earn only slightly less than her husband. She is going for interviews and hopes to be back in work within a month.
They are trying to decide whether to buy a flat in London or establish a small business, such as a restaurant or café, to give them the security of extra income when one or both of them is between jobs.
“We don’t know if we should first focus on buying a flat or a business,” said Ms Ochoa. “If we buy a flat we’re not going to be making any money on it. But if we start the business we’ll be paying two rents.”
They think they have the funds to do one or the other, but not both. They currently rent a one-bedroom flat in King’s Cross for £1,170 a month and own no property.
Ms Ochoa’s savings and investments include £9,000 in a Santander 123 current account and £23,300 in a stocks and shares Isa with NatWest, into which she pays £300 per month. The money is invested in a fund with a mixture of British, European and American shares. Her pension from her first job, which is held in a Scottish Widows fund, is valued at £8,400. She also has a very small pension from her second job, worth around £500.
Mr Watson’s total savings of £44,500 are split between a cash Isa, Santander 123 current account and other savings accounts. His pension pot is worth £20,000. Ms Ochoa and Mr Watson’s cash savings are earning decent interest via the Santander 123 account. They can each have a 123 account and also a joint one. This would shelter all of their cash savings.
They should also look at Help to Buy Isas if they are looking to buy a property worth up to £450,000. Halifax offers an attractive one that pays 2.5pc interest plus the 25pc bonus from the Government.
There are few businesses that can be run “on the side” while you hold down a main job, and a restaurant or café is definitely not one of these.
Restaurants and cafés are capital intensive – you need to spend on property and staff – and many fail each year. It’s not something to go into without a detailed business plan and risk assessment.
Given the assets they have, my advice would be not to risk it on a business they have no experience of and which would be difficult to combine with their main jobs.
Instead, they should look to buy a flat. They can commit £70,000 towards this and would be able to borrow a further £200,000 to £250,000 based on Mr Watson’s earnings, and probably up to £400,000 on joint income. They need to factor in other costs of £7,000£12,000, depending on the price.
This gives them a budget of
‘Restaurants and cafés are capital intensive and many fail each year’
£300,000 to £450,000. A mortgage of £300,000 over 30 years at 1.5pc would cost £1,050 a month and at £450,000 would cost £1,560 a month.
If they do commit to buying a property, Ms Ochoa should withdraw the money accumulated in her stocks and share Isas now, although she could continue with her monthly contributions. If she is comfortable with managing the investments herself I would look to move away from NatWest to an investment “platform” such as AJ Bell.
For future contributions a passive fund that tracks either the UK or global stock markets, such as the Legal & General FTSE All Share fund or the L&G International fund, might not be a bad option.
If she does not want to self-manage she can use an online investment service such as Nutmeg, which provides access to a number of portfolios tailored to the investor’s risk tolerance.
In terms of pensions, Ms Ochoa’s Scottish Widows fund has had only average performance over the past few years, so she could probably do better.
Again, she could manage the pension herself, using providers such as AJ Bell or Alliance Trust.
Given her age, I would choose a passive global stock market fund; the Vanguard LifeStrategy 100pc Equity fund is not a bad option.
Veronica Ochoa and Jamie Watson could afford a £450,000 property
Off the property ladder Gareth Gates