Wealth Check: Action plan for a new financial start in life

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The Independent Online

Doug Allan has recently divorced and moved back into his parents' home in Bromsgrove. The idea is to save money on rent, because until February he was still paying the mortgage on the family home. Doug intends to stay with his parents until he has cleared his loan with Northern Rock, which he took out to cover the divorce expenses.

Some months, Doug is able to save about £1,200, depending on spending, but he's reluctant to put all of his surplus income towards paying off the Northern Rock loan, since this would leave him with little in the way of contingency funds.

His aim is to pay off the loan by the end of the summer and then rent a two-bed property closer to his work for £500 to £600 a month. He expects to need £1,000 to cover a deposit.

Doug would like some advice on how to get back on his feet, out of his parents' house and back on the property ladder. He also wants to save enough money to cover a trip to Australia in February for his sister's wedding.

We put Doug's circumstances to Kathy Booth at The Gaeia Partnership, Jonathan Fry at Jonathan Fry Associates, and James Dalby at Bates Online.

Case notes

Doug Allan, 34, communications engineer

Salary: £45,000 a year.

Pension: Doug has been a member of a final-salary occupational pension scheme for seven years. He is contributing 3 per cent of his salary this year.

Loans: Two loans; on the first, a car loan, the interest rate is 0 per cent and there are 14 monthly payments of £220 remaining; the second loan has £4,500 outstanding, which is the leftover of a Northern Rock personal loan.

Savings: Doug has £600 in an Alliance & Leicester easy access online savings account, paying 5.35 per cent in annual interest.

Monthly outgoings: Doug pays £500 maintenance for his son, £204.55 to Northern Rock for loan repayments, and £220 on the car loan, plus he has general living expenses.

DEBTS

James Dalby says that Doug's debts are easily manageable and suggests that he lets his car loan run its course. He should aim to pay the Northern Rock loan off early, but his current emergency savings fund is low, so building a healthy cash savings balance is equally important.

Kathy Booth says the ideal plan would be for Doug to continue to live with his parents for the next six months. He should use his extra disposable income of £1,200 a month to clear his loan and make savings, and then look at buying a house in October. From the £1,200 available each month, he should pay £900 a month for five months to clear the Northern Rock loan. The increase in the loan repayment is £700, and this will leave £500 a month available for savings.

SAVINGS

Booth reckons that if Doug saves £500 for five months, then in the sixth month he should also save the £1,200 spare cash and the additional £200 saved from loan repayments. This would generate total savings of £4,500 and should be enough for the trip to Australia in 2006. It will also help to pay the stamp duty and legal costs for the purchase of a house.

As a higher-rate taxpayer, Doug should consider using a mini cash individual savings account, says Jonathan Fry. The Alliance & Leicester Direct ISA, paying 5.40 per cent, is competitive, and he could move his £600 currently in an A&L account to avoid paying higher-rate tax on the interest. The A&L ISA is instant-access.

Dalby says Doug should consider adding aggressively to his savings now - then he can decide later in the summer whether he wants to pay off the personal loan. He already uses a very competitive savings account, although he could also consider using a cash ISA for up to £3,000 this tax year in order to achieve some tax-free interest.

Once he is settled in his own home and short-term goals have been realised, Dalby says, longer-term savings and investments will be important. Doug's final-salary pension scheme is a good start, but he should consider using a stocks and shares ISA to build capital.

PROPERTY

Doug is starting from scratch, so saving for a deposit is likely to be his first priority, Dalby says. With property prices now relatively high, getting back on the ladder will not be an easy task, but he is earning a healthy salary and he is clearly able to save a significant amount of money each month.

Fry says that Doug should seek mortgage advice, so he can have a realistic idea of the amount he can borrow and the deposit he will require. Based upon his current salary, he may be able to buy a house for, say, £150,000, depending on the amount he wishes to repay each month.

Booth says it would be better to buy as soon as possible due to potential rises in house prices, and it is not sensible to pay rent unnecessarily. As Doug has a good employment history, he would most likely be eligible for a 100 per cent mortgage on either a repayment or an interest-only basis, with a lender that does not charge high lending fees. Northern Rock and Coventry both offer such deals.

Based on his salary, Doug may be able to borrow up to five times his annual income, less monthly fixed liabilities. However, this loan may not be serviceable, and he would need to assess what monthly repayments he could afford.

He could opt for an interest-only mortgage initially if he needs to keep costs down. Once his car loan is paid off in eight months' time, Doug would be in a position to convert the mortgage to a repayment basis as he would have an additional £220 a month available.

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