‘Divorced at 34, I’m left with £25k’

The Daily Telegraph - Your Money - - MONEY MAKEOVER -

Get­ting back on the prop­erty lad­der is fa­ther-of-two’s next step, says Laura Suter

James Cope, 34, is re­build­ing his life af­ter di­vorce and wants to get his fi­nances back on track. The fa­ther-oftwo, who works in tech­nol­ogy, re­ceived a £25,000 di­vorce set­tle­ment and wants to know what to do with it. His chil­dren, aged six and nine, live in Kent with their mother, while he lives in the Mid­lands.

He is rent­ing a four-bed­room prop­erty, so he has space when his chil­dren come to stay. He sub­lets one of the rooms in this house.

Mr Cope wants to get back on the prop­erty lad­der, hav­ing sold the fam­ily home in the di­vorce. He wants to buy a three-bed­room house, to ac­com­mo­date his chil­dren but thinks buy­ing a four-bed­room place and con­tin­u­ing to rent out a room might make more fi­nan­cial sense in the long term – de­spite it cost­ing more now.

How­ever, he also wants to look at get­ting a base in Kent to make vis­it­ing his chil­dren eas­ier and avoid hav­ing to stay in ho­tels those week­ends.

He has also thought about buy­ing a static car­a­van or a boat, to give him­self a base there.

Mr Cope has £20,000 in credit card debt, in­curred in the past few years, and ad­di­tional mod­est cash sav­ings.

His in­come, from a num­ber of sources, to­tals £85,000 a year. He pays child main­te­nance each month and pays to­wards his com­pany car, as well as £950 rent – but says he can save £1,000 each month.

Mr Cope also saves to­wards his com­pany pen­sion, with him and his em­ployer com­bined putting in around 12pc of his salary.

As well as get­ting on the prop­erty lad­der, Mr Cope wants to have spare money to travel.

“I kind of missed the boat in my youth and never re­ally did any trav­el­ling, so I have got the de­sire to do more,” he said.

Mr Cope hopes to stop full-time work in the next 20 years and work for him­self, giv­ing him more flex­i­bil­ity to travel longer and work fewer hours.

He also wants to save for his chil­dren’s fu­ture.

“I want to save long term for things like univer­sity and to give them a rea­son­ably good start with re­gards to prop­erty,” he said. It’s the start of a new year and a new chap­ter in Mr Cope’s life, which is an ideal time to re­view his fi­nances.

It won’t come as too much of a sur­prise that Mr Cope achiev­ing all his goals on day one is not fea­si­ble. So the key de­ci­sion is when to do each thing.

The de­fault op­tion would be to try to buy the house first and I think a bud­get of £280,000 with a de­posit of £22,000 is rea­son­able now. This would sat­isfy Mr Cope’s urge to get back on the prop­erty lad­der and fix his pay­ments at a low in­ter­est rate for the next five years. But it prob­a­bly means the ex­tra bed­room is out of reach.

How­ever, I think he should wait a bit be­fore buy­ing the house. The best so­lu­tion is to spend up to £20,000 on a static car­a­van in Kent now. This gives Mr Cope and his kids some cru­cial sta­bil­ity and will save those crip­pling petrol or ho­tel bills.

This as­set will de­pre­ci­ate in value, which I know Mr Cope wants to avoid, but I would view this as a cost saved rather than an as­set bought.

I sug­gest Mr Cope’s next pri­or­ity is to im­prove his credit score and prove he has room in his monthly bud­get to af­ford the re­pay­ments when he ap­plies for a mort­gage. As a re­sult, Mr Cope should take the fol­low­ing ac­tions:

Pay off his credit card and use the money saved each month from this and the ho­tel costs to save for a de­posit. He will need to draw on his sav­ings to do this.

Af­ter the past year, Mr Cope de­serves the de­cent for­eign hol­i­day he has planned but I think he should put that on hold un­til he has bought the house and in­stead save for the de­posit.

If it is pos­si­ble to re­duce the amount Mr Cope is pay­ing into his com­pany pen­sion with­out los­ing em­ployer con­tri­bu­tions, it might be use­ful to do this – but only un­til he buys the house – and put the saved con­tri­bu­tions to­wards the de­posit.

I es­ti­mate it should then take about 18 months to save a £30,000 de­posit.

By then, Mr Cope’s earn­ings and credit rat­ing should have im­proved enough for him to pur­chase a house cost­ing £300,000 or more and en­able him to buy that ex­tra bed­room.

If his plan to semi-re­tire at 55 is to work, Mr Cope will need to save into an Isa as well as a pen­sion, so that he has funds to draw on be­fore the pen­sion is avail­able at 58.

I would rec­om­mend Mr Cope leaves start­ing to save for his chil­dren’s fu­ture un­til a few months af­ter he has bought his house and knows what the run­ning costs re­ally are. Based on his cur­rent earn­ings and ex­penses, this goal looks like a tough one to ful­fil. Mr Cope is in a pe­riod of tran­si­tion. It would be wise dur­ing this pe­riod to al­low him­self time to re-ad­just and set­tle into his new life be­fore mak­ing big changes.

Mr Cope’s main fi­nan­cial goal is to buy a prop­erty where he lives. He is rent­ing and pay­ing £950 a month. If he could buy a four-bed­room house for around £300,000 it would make sense, as it is cer­tainly worth pay­ing the £15,000-£20,000 ex­tra for an ad­di­tional room.

This ad­di­tional cost would be re­couped in around three years from rental in­come.

If Mr Cope uses his £25,000 di­vorce set­tle­ment and ad­di­tional money from his cash, this would give him a 10pc de­posit. He would need to use re­main­ing sav­ings for stamp duty and buy­ing costs.

A 21-year mort­gage for the rest at 2pc pa would cost him around £1,300 per month – con­sid­er­ably more than his rent.

In ad­di­tion, buy­ing at £300,000 would de­plete all his cash re­serves and it would be a while be­fore Mr Cope could save to buy in Kent.

A bet­ter op­tion might be to stay rent­ing in the Mid­lands, where the rent is low, and in­stead buy in Kent.

If he could buy at a sim­i­lar value (£300,000 or less) he would make sub­stan­tial sav­ings by not hav­ing to spend money on ho­tels or driv­ing his chil­dren back to the Mid­lands ev­ery two or three weeks.

It would also give him and the chil­dren a nicer en­vi­ron­ment and bet­ter qual­ity time.

The mort­gage will prob­a­bly have to be done on a buy-to-let ba­sis and the re­quired de­posit may dif­fer.

As he only needs the prop­erty once ev­ery two or three weeks, he could let the prop­erty on Airbnb the rest of the time or take on a cor­po­rate let dur­ing the week (sub­ject to the lender’s ap­proval).

As soon as he is able, he should then start to save again, ini­tially to cre­ate an emer­gency cash buf­fer, and then into stocks and shares Isas.

It would be a good idea for him to put in place some life in­sur­ance for the ben­e­fit of his chil­dren.

A fam­ily in­come ben­e­fit pol­icy pro­vid­ing £500 per month would only cost about £5 per month or £12 if he adds crit­i­cal ill­ness cover.

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