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Wealth Check: 'How can I save now I've got a mortgage?'
Published: 16 May 2004
This article appeared in The Independent Save and
Spend Supplement.
The problem
"I have around £5,000 in savings
but this is about to be swallowed up by a flat deposit, legal fees and
stamp duty," says Laura Hogg. The 23-year-old is buying a home just
outside Norwich for £91,500. As her deposit is small, she has had
to take out a repayment mortgage for £88,755 - 97 per cent of the
flat's value.
The deal is on a first-time buyer rate from
the Halifax, fixed for three years at 5.5 per cent, and her monthly repayments
work out at about £540.
"Now I've bought this property, I need
to bed my finances down and start to save," says Laura. "That
£5,000 will go, though, and I won't have anything left. I guess
I should have an emergency savings fund but don't know where to start."
To manage her money, Laura has two Gold
current accounts with Norwich & Peterborough (N&P): each month,
her salary is paid into one account to pay off bills, before she switches
what remains into the other, "fun" account. Any money left at
the end of the month is earmarked for savings, but "there isn't usually
much left".
She owes £900 on a Cahoot credit card
charging 9.3 per cent and tries to pay off £50 to £100 each
month. However, she has fallen behind because of the upheaval of moving.
Each month she also pays £200 to Ford
on a hire purchase deal that gives her a new car every two years.
Laura has already begun to save for her
future. She has three years' worth of pension savings from a former job
at N&P - a final salary deal where she paid in 5 per cent of her salary.
She is unsure whether to leave it, cash it in or transfer it over to her
new final salary pension scheme at Norwich Union (NU).
She is considering buying life cover with
her new firm to benefit from special staff rates but has neither income
protection or critical illness cover.
Interview by Sam Dunn
The patient
Laura Hogg, 23, lives near Norwich.
Job: editor of the in-house magazine for
insurer Norwich Union.
Income: £26,000.
Savings: £5,000 in Head Start, the
young saver account at Norwich & Peterborough.
Investments: none.
Goal: to keep a tight rein on spending as
she settles into her first home.
The cure
"Laura is an example of the financial
challenge facing young people who want to buy a home," says Nick
McBreen at independent financial adviser (IFA) Worldwide Financial Planning.
And although her budget will be tight, she needs to build up an emergency
savings fund and shift her credit card debt to a better deal, advises
Darius McDermott, managing director of IFA Chelsea Financial Services.
The car is also a questionable asset given
its high cost, and at her age, protection is less of a priority than saving.
Debt
Laura should move the balance on her Cahoot
card to one charging 0 per cent on transfers for an introductory period.
This will enable her to clear the balance instead of just paying off the
interest, says Ben Gibbs at IFA Glazers. The Halifax's One Visa card is
offering 0 per cent for nine months before reverting to 9.9 per cent -
which should give Laura plenty of time.
Mr McBreen says she could make big savings
by running a cheaper, second-hand car.
Savings
Making regular monthly payments into a mini
cash individual savings account is a good way to start building up an
emergency reserve, says Mr McDermott. Abbey offers 4.6 per cent and Marks
& Spencer 4.5 per cent.
Laura could also get a very competitive
rate on an internet savings account, including 4.3 per cent with Halifax's
websaver.
Property
Laura could have opted for a lower discounted
variable mortgage rate, but by going for a fixed deal she's removed the
risk of higher payments if the base rate rises, says Mr Gibbs. "She
has a large loan relative to the property's value, but if her income and
the value of her flat rise significantly over the next few years, she
will have more flexibility to review her mortgage."
Retirement
Final salary schemes are "like gold
dust", says Mr McDermott, and Laura should join the NU scheme quickly
and invest as much as possible.
As for her old scheme, the transfer process
is complicated and lengthy. "Her best course of action would be to
leave the N&P pension [pot] where it is and let it grow," adds
Mr McDermott
Protection
Laura should check whether her pension also
carries other benefits; some employers offer policies such as income protection,
says Mr McBreen. If not, she should consider taking out income protection
in case she suffers a serious illness.
Laura could generate £13,000 of income
a year for a premium of £9.02 a month with Liverpool Victoria. She
would need this to start paying out when statutory sick pay comes to an
end (up to 28 weeks after she contracts an illness).
However, Mr McDermott says insurance shouldn't
be her priority. "Given her age, I would encourage her to save rather
than pay protection premiums that she can't afford." She doesn't
need life insurance to cover her mortgage as she has no financial dependants.
For more advice on savings talk to Benjamin
on 020 8458 7427 or email him at ben.gibbs@glazers.co.uk.
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