Too much, too young? Too bad

Your early twenties - it's the time of your life, isn't it? You've finished your education, landed a job, and now you have financial independence and the impulse to spend, spend, spend. I hate to be a party pooper, but...
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The Independent Online

Eat, drink and be merry, for tomorrow we may die, has been adopted by generations of people in their 20s as a guiding principle. In truth, though, it is probably better advice to pensioners nearing the end of their lives than those just starting out with a lifetime of financial commitments ahead of them. "Eat, drink and be merry, but don't forget to invest as you may have a long life," might be a better injunction to young adults.

Eat, drink and be merry, for tomorrow we may die, has been adopted by generations of people in their 20s as a guiding principle. In truth, though, it is probably better advice to pensioners nearing the end of their lives than those just starting out with a lifetime of financial commitments ahead of them. "Eat, drink and be merry, but don't forget to invest as you may have a long life," might be a better injunction to young adults.

Unfortunately, there is a good chance that today's university students will start their working lives with an unhealthy bank balance, as well as student loans to be repaid. Quickly moving to an effective system of budgeting is important if personal finances are not to fall out of control. It may not seem likely at the time, but many adults never again find themselves so well off as in those first years of work.

The amount that must be repaid of a student loan is linked to the borrower's salary. They will be expected to repay 9 per cent of annual income over £10,000, or the weekly or monthly equivalent (see table on this page). Repayments will be collected by the Student Loans Company in co-operation with the Inland Revenue and the interest will be linked to the rate of inflation.

It is a time of life when the prospect of working abroad can seem attractive. But, for most recent graduates, decisions of this kind should be driven by the prospect of enjoyment or experience rather than finance - assuming they can get a job.

Dr Rod Oakland, deputy director of the University of Birmingham's careers centre, says: "UK graduates can't just work anywhere in the world. New graduates without significant work experience can't usually get work permits. If they do it, it is more for career development." He says that job opportunities for most recent graduates will be limited to within the European Union, where salaries will be comparable to those in Britain.

Assuming that debts can be brought under control, it may be sensible to think about buying a home. There is a strong chance that mortgage repayments will be similar to rent for a flat or house, with the added bonus of that first step on the property ladder and putting money into an excellent investment (see table on page 2). It may also be possible to share the home producing an income to assist with the mortgage - but remember to tell the home insurer of the arrangements.

Potential borrowers should ensure their personal finances are sorted out before they apply for a mortgage, suggests Ray Boulger, senior technical manager, mortgages, for John Charcol brokers. They will need to have three months of bank statements available to show lenders, which should not include any bounced cheques which are "quite a turn-off", he says.

Lenders will also do a credit check on potential applicants probably through one of the two main agencies, Experian or Equifax. These can be damaging if they show, for example, an unpaid old utility bill in the borrower's name. A recent student who has moved around a lot may be unaware of outstanding debts, so it is sensible to ask a mortgage broker to do a credit check - or do it yourself.

Checking credit references is simple. Both Experian (Consumer Help Service, PO Box 8000, Nottingham NG1 5GX) and Equifax (Credit File Advice Centre, PO Box 3001, Glasgow G81 2DT) should be contacted, as their sources of information can vary and the results of their credit checks may differ. A signed letter should be sent, containing full name and maiden name if married, plus addresses of all properties lived in during the past six years and a cheque or postal order for £2.

If the reply contains damaging or disputed information it is important to act. Any outstanding bills should be paid off and if there are any disputed charges the credit reference agency should be advised and asked to include this information in its records.

When it is clear credit status is good, a mortgage application can be submitted even before a suitable property is found. This is a sensible precaution, as it allows a buyer to know what property values can be considered. But, it may take several weeks to find the desired home by which time better mortgage deals may be on the market - so compare mortgage offers again before signing a contract.

Choosing a mortgage with such a wide variety of available deals is confusing. "Interest rates are key," says Mr Boulger. "If borrowing a high multiple of salary, which is likely to be the case in London and many parts of the country, you can often still get a high discount but it may be a better idea to take a fixed or capped rate mortgage rather than going for a high discount, which may initially be cheaper. Initial borrowers should also watch redemption penalties. Don't take a deal which locks you into penalties beyond the term of the deal."

More controversially, Mr Boulger believes that borrowers should also consider taking out 100 per cent mortgages when this enables them to buy their first home. "There are some good 100 per cent deals around," he says. "But some very bad ones, too. For some people, a mortgage costs about the same as rent, but they can't get the deposit together because they are paying so much rent." But he warns that the choice of lenders reduces when borrowers increase the amount they wish to borrow as a percentage of their salary.

Steve Herbert, partner at another broker Select Mortgages, gives different advice to clients. "I like to see people have a deposit," he says. "There are some good 100 per cent products, but I still like to see people have 5 per cent, or preferably 10 per cent, to avoid the dreaded mortgage indemnity guarantee." Both Mr Herbert and Mr Boulger want their clients to avoid mortgage indemnity insurance - which is expensive but offers little benefit to the borrower and can cost as much as £3,000 on a 100 per cent mortgage, says Mr Boulger.

Mr Herbert recommends consideration of a mortgage product from Verso, which has a discount, lends up to 102 per cent, no mortgage indemnity insurance and flexible terms, aimed at first time buyers. He also suggests clients generally go for repayment rather than endowment mortgages, which have been blighted by concern that poor stock market performance could leave them unable to fully cover the mortgage at the end of term.

Too often, warns Mr Herbert, first time buyers dramatically underestimate the incidental costs of moving home. "Have they got their solicitors and valuation fees, the moving costs, as well as the deposit sorted out?" he asks clients. "Murphy's law says that the first day you move in you will get the council tax bill and so on to pay. You need a couple of thousand for everything that is going to go wrong. We also counsel homebuyers on whether they should go for a full structural survey. Any retention [the lender's stipulation on work that must be carried out] for electrical wiring etc is more likely to be placed on the home of a first time buyer looking for a romantic property." While a full structural survey can cost about £800, it is worth it if it avoids a buyer having the subsequent cost and inconvenience of major building repairs, for example arising from subsidence which may be missed by a simple valuation.

Home buyers may also now consider taking out a mortgage through a flexible current account or "all in one account", which brings all loans into a single account. The leading example of this is the Virgin One product, which is operated by the Royal Bank of Scotland and has been available since 1997. There is no fixed term or monthly repayment, customers instead agree to reduce the balance to zero - or into credit - before they retire.

One of the benefits of this approach is it avoids high cost bank loans, store cards and credit cards. Virgin One's facility rates vary according to the borrower's upper limit, ranging from 7.1 per cent to 7.95 per cent. This compares favourably with credit card interest rates that can be over 20 per cent. Over half its customers use the online banking facilities and one requirement is that clients' salaries are paid direct into the account. "It offers the ultimate flexibility,"

says Virgin One's Andy Smith. "It gives someone an opportunity that any money they save on a regular basis reduces the capital owed on a house. If you are the type of person who saves £50 a month this will suit you and you will pay your mortgage off much quicker: 94 per cent of our customers are ahead of their plan and 63 per cent are more than £5,000 ahead of plan."

But, Mr Herbert cautions that this type of mortgage borrowing is only suitable for people with strong financial discipline and a good income - for example, accountants and other professionals. "What frightens me is that the bulk of my business is remortgaging people," he says. "You then see the secondary debt, the true state of the economy. We are forever pulling ordinary, lovely people out of the mire. Current account type mortgages worry me because people think they can add things to the mortgage and it won't matter. I believe that 10 or 15 years down the line people will be saying 'I was never told this would prevent me paying off my mortgage' and we will have another case of supposed mis-selling."

One product that Mr Herbert strongly recommends for home buyers is sickness and unemployment insurance, but to shop around for the best buy. The same advice applies to the purchase of buildings and contents insurance - do not accept the first quote. Instead, phone an insurance broker to obtain a guide price then phone perhaps as many as 10 direct insurers listed in Yellow Pages and go with the best offer. Two or three hours on the phone can save £200 or more in insurance premiums - as it can, too, with motor insurance.

There are numerous other financial products that the working adult should consider - including pensions, life assurance and permanent health insurance. Unwisely, many people ignore these until later in life when costs may rise markedly. Although it is better to buy them early, we will review these next week when we move on from the age of youth to the onset of family duty - when the financial burdens multiply.

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