THE topics broached by our makeover subjects are many and varied, but for true originality it would be hard to beat one raised by a young couple from London last summer.
Downshifting to Spain “for a better quality of life” is a dream shared by many, but in Andy James and Claire Knapton’s case there was a slight difference: they planned to take a herd of llamas with them. In the hills of Andalucia, their aim was to turn a delapidated building into a home and set up a llama-trekking business.
One year on, we caught up with Andy, a zookeeper, and Claire, a consultant on fundraising, to find out if they had escaped the Big Smoke. Now married, their dream is alive and well, but Spain is out of favour. Claire says: “We found it expensive, with too many British people.” Andy fancied Panama, but this was just a bit too much adventure for Claire.
In the hunt for somewhere “different, but not too different”, they finally settled on Italy. Puglia, “the new Tuscany”, appealed most and they found their ideal home in the shape of a rundown farmhouse for €87,000 (£59,000).
The venture would not have been possible without the UK property boom. Andy, 35, had so much equity in his humble North London flat that they could remortgage to raise £120,000. Claire, also 35, has a mortgage of just £71,000 on her £230,000 cottage in Brixton. The cottage is let, and they plan to keep it as a “retirement fund”. Interest-rate rises have hurt — in December mortgage payments were £511 a month, but Claire now pays £
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584. The rental yield is £800.
They are tempted to pack their bags today, but may wait 18 months to build up their savings first. The renovation work will cost at least £100,000. “The message from our last makeover was that we should not overborrow,” Claire says.
Out of their net monthly pay of £4,500, they save £2,500 in Standard Life’s Direct Access savings account. Before they go, they must decide what to do with their pensions. Andy is in a final-salary scheme while Claire has a stakeholder plan.
Llamas no longer feature in their future. “They don’t mix with olive groves and blue seas,” Claire says. Instead, they plan to set up a guesthouse and Andy will qualify as a diving instructor, while Claire may teach English.
WHAT THE EXPERTS SAY
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David Hollingworth, mortgage specialist, London & Country Mortgages
“Andy and Claire are approaching the project sensibly. One decision to make is whether to keep Andy’s flat as a rental property when they move. Looking at the numbers, keeping it could entail too much borrowing for comfort.
“Claire’s cottage is a more stable investment. To cut her outgoings, she could either move to an interest-only loan or remortgage. She should first approach her mortgage lender to see if it will offer her a better deal.
“Take set-up costs into account when comparing deals. We offer a buy-to-let tracker of 0.70 per cent above Bank of England base rate, giving a pay rate of 5.45 per cent. The arrangement fee is £625. There are no redemption penalties. NatWest offers a two-year discounted deal at 5.19 per cent, with an arrangement fee of £395 plus valuation and legal fees. Abbey has a similar product at 5.70 per cent. Interest-only, these deals would cost £322.46, £307.08 or £337.25 a month respectively.
“If Claire prefers a fixed rate, Woolwich has fees-paid options over two or five years at 6.69 per cent, giving a monthly cost of £395.83.”
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OVERSEAS MORTGAGES Ben Maher,
Italy mortgages specialist, Conti Financial Services
“Andy and Claire were right to buy the Puglia property for cash. Some lenders in Italy do not view such dilapidated buildings as a good risk for a home loan. They finance home improvements, but not full renovations, so funds for this would best be raised in the UK.”
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INVESTMENT
Mark Dampier, head of research, Hargreaves Lansdown
“Given current property prices, I think it would be better to sell Andy’s flat. I can understand why they wish to keep one bolthole in the UK, but I would be very cautious about calling a property a retirement fund. Investors should have a diversified portfolio.
“I expect interest rates to rise, so it is difficult to pick the best cash accounts. Given the amount that they can save, an extra 0.25 per cent or 0.5 per cent can make a difference. They can do better than their Standard Life account and should start with cash mini-Isas. Abbey pays 5.35 per cent. After this, look at ING Direct, which will pay 5 per cent from September.
“A pension is merely a tax-efficient savings plan, so it is vital to get investment choice right. Claire invests in AXA’s Ethical fund, but its performance does not inspire me. Look for the top fund managers. I recommend Invesco Perpetual’s UK Equity Pension Fund, which is run by Neil Woodford.”
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ETHICAL PENSIONS
Amanda Davidson, partner, Charcol Holden Meehan
“AXA Ethical’s performance is fine compared with the FTSE all-share index. Over five years it has been virtually the same as the FTSE 100 at minus 14 per cent, with periods of outperformance.
“Claire might like to consider other ethical funds.The NU UK Equity Ethical fund has made 6.5 per cent over five years (10.6 per cent over the past year), while Friends Provident’s Stewardship fund has made 1.3 per cent over five years (16.8 per cent over the past year). These have both outperformed the FTSE.”
PENSION RULES
Elizabeth Gibling, pensions technical manager, Chase de Vere Financial Solutions
“When Andy leaves his job, he could either keep the benefits in his pension scheme, transfer to a UK personal scheme or transfer into an occupational or personal scheme in Italy. Many conditions have to be met before a pension can be transferred outside the UK, so Andy should speak to a specialist before he takes action.
“If he leaves the benefits in the scheme, these will be paid in the usual way, but with a currency conversion charge. Andy belongs to a final-salary scheme, which will provide a specified income at retirement. He may wish to hold on to this type of security.
“Contributions to Claire’s stakeholder plan can continue for a further five years after she has left the UK, with tax relief. Andy could also set up a stakeholder plan after he has left his job and before he leaves the UK.
“Pension rules are changing in 2006. People overseas without UK earnings contributions will be able to continue a stakeholder beyond five years, but without basic-rate tax relief. Funds will grow free of UK income and capital gains taxes.
“For information about national insurance contributions and the state pension, contact The Pension Service’s international office on 0191 218 7777.”
MONEY TRANSFERS
Nick Bull, marketing manager, Moneycorp
“The sterling amount that they will have to pay for the Italian property will fluctuate depending on exchange rates with the euro. Even a small movement can make a difference. The house would have cost £57,500 at the beginning of August, but more than £59,100 mid-August.
“It is possible to take advantage of currency fluctuations by timing a transaction to make the most of a positive movement. Protection from adverse movements can be obtained by fixing exchange rates for up to two years.
“There are now a number of currency brokers in the UK that tend to offer better rates than a bank and cheaper transfer fees — typically between £10 and £20 per transfer compared with £25 to £40. Transfer times are usually faster.
“Andy and Claire would be better off saving their renovation money in the UK because interest rates are currently higher than in Europe.”
CLAIRE’S RESPONSE
“It’s a fantastic amount of advice for us — and it’s free. I will challenge Birmingham Midshires, my lender, to find me a better buy-to-let deal and seek alternatives if its offer is not satisfactory. However, we do not want to change to an interest-only deal. We want to be sure that the mortgage is repaid at the end of the term.
“We chose to remortgage rather than sell Andy’s flat because we are divided about which option is in our best interests. Remortgaging gave us the chance to have the money we need now to buy the home in Italy that we really want.
“We will look at putting some of our savings in a fixed-rate bond and compare the interest that we are receiving on our savings with the accounts that the advisers have suggested.
“Andy will leave his current pension where it is, but look at choices for when we move. One big advantage of stakeholders is the flexibility — we can lower or stop contributions in hard times.
“There appears to be a difference of opinion about the performance of my pension fund. I will look into the benefits of changing to another ethical investment.
“Seeing exchange-rate movements translated into the cost of the new property is painful. We will see how currency brokers can help.”
Would you like a financial makeover? Write to Money,
The Times, Times House, 2 Pennington Street, London E98 1TB, marking your envelope Money MoT, or you can e-mail moneymot@thetimes.co.uk.
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