Wealth Check: 'Help! My salary is being swallowed by my debts'
A university worker feels trapped by a personal loan plus credit and store card debts, as well as her interest-only mortgage
Sunday 22 July 2012
Pam Mullin, from Tyldesley in Manchester, is desperate to clear the hefty debts she owes on a number of credit cards, store cards and a personal loan, as her monthly repayments amount to more than £450.
The 38-year-old divorcee also feels trapped by her mortgage.
Pam has worked at the University of Salford for the past 16 years, and in her current role as project manager she earns £33,000. This position is on a fixed-term contact which ends in June 2013.
At present, Pam's biggest debt is a £3,300 loan with the Royal Bank of Scotland (RBS). "I pay around £293 a month towards this debt, but am due to clear it in July 2013," she says. "I also owe £1,900 on a Virgin Money credit card and £500 on an RBS credit card, which costs me £65 a month. In addition, I owe £1,100 on two store cards, and these cost me £75 per month."
Pam has a current account with RBS and tends to reach the £1,200 overdraft limit every month.
"The monthly payment of nearly £300 per month for the personal loan is crippling me," she says. "I appreciate I only have another year to pay on this, but I'll still be left with my other debts – plus I currently have no money put aside in savings or investments."
Pam bought her two-bed terraced house in March 2007, with a Northern Rock Together Mortgage. She has £102,000 outstanding.
"I came out of five-year fix in January 2012, and am now on a standard variable rate (SVR) of 4.79 per cent," she says. "This is on an interest-only basis and my monthly repayment is £444. As things stand, I feel trapped."
Pam is also worried about her credit rating, as when she tries to move her credit cards to more competitive deals, she gets turned down. "I'm trying to manage the debt repayments on my cards and other debts to improve my credit score, but am struggling," she says. "I know I have a reasonable amount coming in each month with no one to support but myself, and I do try to make savings where I can by making purchases through cashback site Quidco.com, for example. However, I feel I'm not able to be efficient about whittling down my debts."
A long term goal for Pam is a new home. "One day I'd like to be able to move to a similar-sized property in a nicer area," she says.
Pam has a pension through her employer and currently pays in £205.63 per month, but she has no protection policies in place.
Our panel of independent financial advisers agree that Pam's immediate priority must be tackling her debts, and they suggest she delays any plans to move her mortgage until she has paid off her debts and built up some cash savings.
Pam should look closely at where she spends her money to see if she can cut costs, says Helen Kanolik from Financial Advice Ltd.
"Her situation is a very sad one, common after a divorce, but she is right that her first objective should be to clear as much debt as possible," she says. "Pam needs to review outgoings, and how much is left after she has paid her fixed bills. She should then look at her discretionary spending to see if she can trim any of it. It's hard to do, but if the situation is to improve, she may have to do without any treats for a while."
Pam should begin by repaying the debt on which she is paying the highest rate of interest, assuming there are no penalties for doing so, says Patrick Connolly from AWD Chase de Vere. "She should then make a concerted effort to systematically pay off all her debt, as she won't be able to move forward financially until she's done this," he says.
Steven Poulton from Brunning Newman Houghton suggests Pam could also speak to a free advice charity, such as Citizen Advice (citizensadvice.org.uk).
"Pam is clearly in a difficult situation as her debts are consuming her salary and leaving her with very little room for manoeuvre," he says. "Citizens Advice can provide free guidance and can help investigate any state benefits or tax credits that Pam may be entitled to."
He also suggests Pam could speak with her creditors who may be willing to reduce her payments, or even offer a payment holiday. "They won't want her to become bankrupt – leading to default," he says. "It may also be possible to consolidate the debts, but this could lead to higher repayments in the long term."
Consider mortgage options
While Pam may feel trapped by her mortgage, Mr Connolly warns that her options are likely to be limited.
"If Pam has some equity in the house, this may give her some scope for alternatives," he says, "If not, it is unlikely that lenders will be keen to offer a 100 per cent mortgage to someone with debts and no savings, who is on a fixed-term contract at work and looking for an interest-only deal."
Mr Connolly urges Pam to think about whether she could afford the monthly mortgage repayments if she moved to a repayment mortgage once she's paid off her debts.
"This would mean higher monthly costs," he says. "But, she needs to remember that if she stays on her lender's SVR and rates rise, so will her monthly repayments. Equally, I'm afraid that for the time being, her hopes of moving home will also have to remain a longer term goal."
While there is little point building savings if the interest is less than the amount she is paying on her debt, everybody should keep at least some cash to cater for short-term emergencies, says Mr Connolly.
Mr Poulton adds that this fund should be roughly equivalent to three months' salary.
"This will give Pam a little something to fall back on," he says. "At present, she is living in her overdraft, but this should be viewed as a short-term strategy, as charges can mount up quickly if the limit is exceeded."
"Cash savings will help to give Pam more options with her mortgage," says Mr Connolly. "She should look to hold savings in a tax-free cash individual savings account (Isa). While I would also usually suggest a 38-year-old should be giving some attention to longer term savings and investments, Pam isn't in a position to do so until she has addressed her shorter term financial issues."
Continue pension saving
The biggest positive in Pam's finance is her membership of the university pension scheme, says Mr Connolly.
"If Pam joined this when she joined the university she should have built up decent pension benefits," he says. "This scheme's benefits are guaranteed by the Government, and while there has been talk of changes to public-sector schemes, it will remain hugely beneficial to members, and she should retain membership."
Pam should also increase contributions when she can, he adds.
While Pam seems to have little need for protection, Mr Connolly urges her to check what she is entitled to through her employer.
"She should have life assurance and income protection provided," he says.
Do you need a financial makeover? Write to Julian Knight at The Independent on Sunday, 2 Derry Street, London W8 5HF firstname.lastname@example.org
- 1 Edward Heath 'raped 12 year-old boy at Mayfair flat'
- 2 London is the most googled city in the world
- 3 Porn block in India: hundreds of sexual websites banned, internet outraged
- 4 Giant Minion terrorises drivers in Ireland as 40ft inflatable blocks traffic on Dublin road
- 5 Richard Dawkins ridicules Sabrina Corgatelli for claiming her giraffe kill was 'ethical'
Is Britain really full up? Are migrants taking our jobs? Leading academic answers the most common anti-immigration claims
Calais Migrant Crisis: Deputy Mayor of Calais labels Cameron's use of 'swarm' as 'racist' and 'ignorant'
Chris Leslie: Jeremy Corbyn's anti-austerity agenda will harm the poor, says Labour shadow Chancellor
Landlords renting properties to illegal immigrants to face up to five years in prison
While we fixate on Calais, the Home Office is quietly deporting dozens of migrants on 'ghost flights'
Labour leadership race: Jeremy Corbyn could be the next Prime Minister, says Ken Clarke
iJobs Money & Business
£35 - £50k DOE: Guru Careers: A Tax Manager / Accountant (ACA / CA / CTA) is n...
£35000 - £37000 per annum + benefits: Ashdown Group: Contracts Executive - Cit...
£20000 - £25000 per annum + OTE £45K: SThree: SThree Group have been well esta...
£21000 per annum: Recruitment Genius: This is an exciting opportunity to join ...
Day In a Page
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.