FATHERHOOD. One minute Shrikant Srivastava was zipping about the countryside in his two-seater Lotus Elise. The next, sports cars are no more than a memory and the only course he is trying to steer is through a mountain of post-natal bills.
Mortgage costs are at the top of the list. Shrikant, a registrar at a psychiatric hospital in Bristol, must find extra room in his wallet not only for Neelkant, his five-month-old son, but also another addition to the family — a second home.
Six months ago, Shrikant, 38, and his wife, Surabhi, 29, moved from Birmingham to Bristol so that Shrikant could take a step up the career ladder with a new job.
They have bought a home, but not yet sold the old one. “I haven’t sold yet because I do not know what our tax position is,” he says. “Would we have to pay tax on the profits?” The value of the house has risen from £82,000 to £150,000 since 2000.
The couple may keep the property in case they return to Birmingham in a few years’ time. Letting it could give Surabhi an income of about £600 a month while she is not working. An IT trainer, she wants to take a career break until Neelkant starts school.
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Two lots of mortgage payments are making a heavy dent in Shrikant’s gross salary of £55,874. He is tempted to sell his first home to reduce the outgoings on the second, but wonders if this short-term fix would be at the expense of better long-term profits.
He hopes to resolve his dilemma before his wife and baby return later this month from India, where they have been visiting relatives.
The £63,000 mortgage on the Birmingham house, with Alliance & Leicester, is a two-year fixed-rate deal until September. Monthly interest is £270, but this will rise when the low-rate deal ends.
The house in Bristol cost £228,000 and Shrikant borrowed £200,000 to buy it. Cheltenham & Gloucester was the only lender he could find that was willing to stretch this far, and interest on the two-year, fixed-rate deal, at 5.6 per cent, costs £932 a month.
Mortgage-related costs do not stop there. Shrikant has started two 25-year investment plans that he hopes will pay off the home loans. He puts £154 a month into an endowment policy with Royal & SunAlliance, and £950 a month into a “versatile investment plan” with Standard Life. Both policies include life cover. “Should I continue these investments or change to repayment mortgages?” he asks.
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Shrikant, who came to the UK from India in 1997, has started to amass a portfolio of Isas. He has invested £7,000 a year for three years in maxi-Isas with Isis and Skandia. Four of the underlying funds are Fidelity Managed International, Framlington Managed Portfolio, Jupiter Fund of Investment Funds and M&G Managed Growth.
He asks: “Should I encash these and pay down my Bristol mortgage? If I continue to invest, should I be putting money into individual shares each year instead of funds?”
WHAT THE EXPERTS SAY
INVESTMENT
Mark Dampier, head of research, Hargreaves Lansdown
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“Shrikant should check whether his endowment plans are unit-linked or with-profits and make sure that he understands them. I am somewhat shocked that he was sold the Standard Life plan in the first place. The commission must be colossal.
“It would surely be better to pay down some debt, or stick to Isas. The decision about moving to a repayment mortgage is a personal one and depends on your attitude to risk. If Shrikant feels his debts are too large, it makes sense to reduce them. He should also have a cash float of about six months’ salary.
“The only change I would make to his Isas would be to move Fidelity Managed International, which has been poor, to his M&G holding. Unless he has plenty of time to monitor investments, I would avoid shares.”
MORTGAGE
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James Cotton, specialist, London & Country Mortgages
“About 75 per cent of Shrikant’s net income is going on mortgage-related costs. Switching the C&G loan to repayment would increase the cost to £1,319 a month, but reduce his overall outgoings by £500 a month if he stopped the Standard Life plan. I advise him to learn more about his investment plans.
“If he lets the house in Birmingham, he may need to switch to a buy-to-let mortgage. A&L may give him permission to keep his existing rate, but it could charge an administration fee for this.
“If he does need a new deal, this should not be a problem because rental income of £600 a month will easily cover mortgage payments. Most lenders require rent to be at least 125 per cent or 130 per cent of the monthly interest.”
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TAX
Sheena Hay, senior tax manager, Grant Thornton
“The sale of a main residence is normally exempt from capital gains tax (CGT). This exemption also applies if the house is sold within three years of leaving the property.
“However, if Shrikant is resident and ordinarily resident in the UK, but not domiciled in the UK, he would be subject to CGT on the sale of UK assets. Domicile status for tax purposes depends on a number of factors including the domicile of a father and future intentions.
“These rules are complex, so more specific individual advice should be sought. There may be a number of tax planning opportunities that are not related only to property.”
Shrikant’s response: “The Standard Life policy is on my mind because it is a big financial commitment. If I cancel it, I will lose about £1,000 in one go, but to balance that I could be better off in the long term. I am concerned that I have too many eggs in one basket.
“I have spoken to C&G, my mortgage lender, and the mortgage will cost me £100,000 less overall if I change from an interest-only loan to repayment. I will also try to make overpayments.
“There was little criticism of my Isa choices, which is good. The returns have improved recently. It is true that I do not have time to follow the stock market, so I will avoid investing in shares directly.
“The tax advice raised interesting questions and I will look into the domicile issue. I am glad that I wrote in because the advice is very comprehensive.”
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