Wealth Check: 'Can we build a financial future out of bricks and mortar?'

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The problem: Just £5,000 saved so far for a £50,000 deposit

As a young couple hoping to grab the second rung of the property ladder, Sheridan Baker, 28, and husband Matthew, 29, are keen to boost their savings.

"We want to move into a detached house within the next 18 months," says Sheridan. "We know we need around £50,000 for a deposit as we have already found our perfect place."

The couple bought their first home - a three-bedroom, semi-detached house in Corby, Northamptonshire - for £150,000 in April last year. It is now worth £157,000. They pay £695 a month on their 25-year, £130,000 repayment mortgage: a two-year fix with Abbey at 4 per cent.

Sheridan started her own business - a recruitment consultancy - in January, while Matthew works as a project manager for a management consultancy. But despite a combined income of £80,000, they haven't been able to build up much in savings. They have just £5,000 in a Tesco account paying 4.5 per cent.

Their long-term investment goal is to amass a portfolio of properties. "We would like to have at least 10 within the next 12 years," says Sheridan, "and rent them out for a number of years and then sell them off to fund our retirement."

Today, however, the couple must contend with debt, owing £15,000 to Household Bank in personal loans at 9.9 per cent.

Neither Sheridan nor Matthew pays into a pension or has any protection policies.

The cure: Cut your debts and don't ignore pensions

Their ambitious plans for both the short and long term will be hard to achieve, warns Amanda Davidson of the independent financial adviser (IFA) Baigrie Davies. "Many people think the solution to their financial future is to invest heavily in property, but it is never sensible to put all your eggs in one basket."

As a priority, she says the couple need to cut their debts and draw up a budget to see where they can make extra savings.

Anna Sofat from IFA AJS Wealth Management suggests they begin with one buy-to-let property to see how they get on, before thinking about expanding their portfolio. But she adds that they shouldn't do this at the expense of ignoring pensions.

"I would urge them to take a balanced approach to pensions and buy-to-let, spreading their investments between them."

Savings/investments

Ms Sofat recommends switching the £5,000 in the Tesco account to a tax-free mini cash individual savings account (ISA). There is a £3,000 annual tax-free allowance per person, so between them, they could transfer the full sum. Portman building society's cash ISA pays 5.3 per cent, she adds.

Property

To fund the ambitious £50,000 deposit to buy a new detached home within the next 18 months, Sheridan and Matthew would need to save more than £2,500 a month from their take-home pay, says Ms Davidson.

But based on their salaries, Ms Sofat estimates the couple will be able to set aside only £1,000 a month. Instead, she suggests, they could finance the deposit by raising the amount they repay on their existing mortgage. "If they increase it to £180,000 [releasing £50,000 in cash], this would cost £1,065 a month. That loan would be just over two times their joint income and should not have too much of an impact on their lifestyle."

She urges them not to rush into buy-to-let. "People are often attracted to this market because they see it as easy money, but you can lose as well as make cash."

Ms Davidson adds that if they were to sell any buy-to-let property, they would face a capital gains tax bill. They also need to factor in periods when a house is empty and yielding no rent, as well as maintenance costs.

Debts

Jason Stather-Lodge of IFA OCM Wealth Management urges the couple to tackle their debts as soon as possible, so they can focus on building their savings.

Ms Sofat recommends repaying the £15,000 by taking out a new personal loan at a lower rate. Direct Line charges 5.6 per cent, she says, and Alliance & Leicester 5.9 per cent. However, they should make sure that this saving isn't swallowed up by any "early exit" penalty for switching from Household Bank.

Retirement

Ms Davidson says: "As they are both approaching 30, they need to put at least 10 per cent of their annual income into pensions to have some chance of retiring on any reasonable level of income."

Mr Stather-Lodge urges Matthew to check what scheme is available from his employer, while Ms Sofat points out that pensions are highly tax-efficient and that the couple could even consider self-invested personal pensions (Sipps). The charges will differ according to the type of Sipp. If you invest in a broad choice of funds, it will be around 1.5 per cent; put your money into assets such as commercial property, and it might be 4 per cent.

Protection

As Sheridan and Matthew are reliant on each other's income, they should consider life cover at the very least, says Ms Sofat.

Sheridan should also think about taking out an income-protection policy, as she has no employer to provide this for her.

If you would like a makeover, write to Sam Dunn at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email s.dunn@independent.co.uk

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