How can I spend an extra pounds 3,000 a year?

Name: Apurba Kundu Age: 35 Job: lecturer at the University of Bradford Salary: pounds 20,000
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The Independent Culture
Apurba has just been promoted, bringing him a welcome salary increase. He is now up to pounds 20,000, from pounds 17,000. But with a two-year-old daughter to support - and he hopes for another baby - the extra income doesn't exactly mean that he and his partner can afford to splash out.

"Although my previous salary supported us, we have not been able to save a penny," he says. Now he wonders: "How best do I use the extra money?"

Buying a house is top of the list. Apurba's father has offered to give the couple a deposit of pounds 20,000 and on top of that they can get a mortgage of up to pounds 60,000. They also plan to save for their daughter's university education. While Apurba wants to build up savings, he's not particularly worried about insuring against losing income if he gets ill. "I'm half- Indian, and I have the ability to be able to count on my family ... I know that if push came to shove my mortgage would be paid for and my daughter would be looked after," he says.

Christine Ross, director at Abbey National Independent Financial Advisers (0171-548 1400) says: "Apurba should end up with about pounds 170 more every month net after his pay rise. He's obviously worked hard to keep his finances in order - he has no debts. But now his mortgage will cost more than the pounds 300 a month he's been paying in rent, so the most important thingis choosing the right mortgage. Apurba and his partner have initially gone for a five-year fixed-rate loan with Cheltenham & Gloucester, which offers a rate of 7.69 per cent. A pounds 60,000 mortgage will cost pounds 355.66 per month after tax relief. I think it's a good idea to go for a fixed rate. It means no nasty surprises during the early years. But a two-year fixed- rate with Bristol & West at 5.19 per cent will cost pounds 241.23, again on an interest-only basis.

"Apurba is thinking of taking out an endowment policy to repay the mortgage at the end of the term. There's nothing really wrong with this, but endowments can be a bit inflexible. If you find you can repay your mortgage early, endowments really need to run to their maturity date for maximum benefit. And you need to check regularly that the investment is on track, as there's no guarantee it will have grown enough to repay the mortgage at the end of the term. An endowment policy set up to repay a pounds 60,000 mortgage over 25 years, which also provides life assurance, would cost pounds 95.75 with Legal & General. This assumes an investment return of 7.5 percent a year.

"Some banks offer flexible mortgages. These can make it cost-effective to overpay - make bigger repayments than you originally agreed. Some also let you underpay when money is stretched. Of course, you can overpay on a traditional mortgage as well, but with a flexible mortgage the repayment is taken into account immediately rather than once a year when the interest is worked out. Apurba probably will not want to overpay in the early years but, if his partner goes back to work later, they may have more money to spare. Flexible mortgages can be used with repayment and investment- related (endowment or PEP) loans, and are currently offered by Bank of Scotland, Clydesdale Bank and Royal Bank of Scotland, as well as Legal & General and Scottish Widows Bank.

"Royal Bank of Scotland's plan lets borrowers have six months off mortgage payments after it has been running for six months. It is available at the bank's normal variable rate of 7.7 per cent. On a repayment basis, monthly payments would be pounds 427.57 after tax relief. Borrowers would also need to take out a decreasing life assurance costing a further pounds 15.78 per month with General Accident. So the flexible mortgage approach works out about pounds 8 per month cheaper than the C&G plus endowment, but don't decide on this factor alone. No one has absolute job security these days, and being able to alter financial plans to suit changing circumstances is becoming more of a priority.

"Don't forget the other costs of buying a house. Stamp duty of 1 per cent is payable on properties over pounds 60,000, and there are also solicitor's fees and possibly the cost of a property survey, depending on the deal offered by the mortgage lender. As they have no savings, Apurba and his partner will have to meet these costs with some of the money they have for a deposit.

"As for saving for his children's university education, Apurba still has 16 years, assuming his daughter is 18 when she goes to university. Estimated tuition and living costs being about pounds 5,000 in today's terms, they would have to save about pounds 88 a month for each child over 16 years to pay for a three-year course. This takes account of inflation and assumes an average return of 9 per cent a year. An investment trust savings plan is worth considering. The Legal & General Recovery Trust accepts a minimum monthly contribution of pounds 25. Investment charges are low, with a purchase charge of 1 per cent and an annual management charge of 0.5 per cent. This is an adventurous fund, but Apurba has time on his side and investments do tend to perform better over the longer term. Again, he must keep track of how savings are progressing."

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