Wealth Check: Help us clear debts and reduce our mortgage

A family under strain faces a long, slow slog to financial stability after consolidating loans instead of cutting their expenditure. By Harriet Meyer
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The Independent Online

THE PATIENT

The Quigleys' finances are under strain. The family is saddled with £24,700 of debt, and beside their mortgage and outgoings this is stretching them to the limit. They pay £312 a month for a £19,000 personal loan with Lloyds TSB over seven years at 10 per cent. "This was taken out nine months ago to consolidate credit card debt," says Amanda, 42, a part-time representative for Avon. She lives with her husband, Gary, 46, an HGV driver, in Whitefield, Manchester, earning a combined salary of £35,000. They have two children: Paige, nine, and Kira, four.

Since taking out the loan, they have amassed £2,700 on an MBNA credit card at 15.9 per cent, and £3,000 on a Lloyds TSB card at 16 per cent. "Our goal is to reduce this as quickly as possible," she says.

They also pay £826 a month for a £111,000 repayment mortgage over 16 years on a standard variable rate (SVR) at 4.69 per cent with Northern Rock. They are unable to shift their mortgage onto a more attractive rate. "We think we need 85 per cent loan-to-value to borrow what we need, and we are just under this threshold," she says.

The couple bought their three-bed house 15 years ago for just £18,000, and it is now worth £135,000. "It was a wreck and we had tons of work done to it, and consolidated loans and cards into our mortgage as well which explains why this is so big," she says.

While they find they are unable to make rainy day savings as well as service their debt, Amanda has a cash individual savings account with Alliance & Leicester in place paying 2.5 per cent. "But this has little in it as it's used to provide for birthdays and holidays," she says. Also, Gary has £2,000 in a PepsiCo share scheme.

Towards retirement, he pays 5 per cent of salary into his company's money purchase pension scheme. She has "a few frozen pension plans" from previous employment, but hasn't added to these for seven years. "And I can't find the paperwork to find out how much is in them."

They pay a total of £64 a month for £200,000 worth of life cover for her and £300,000 of cover for him with Bright Grey.



THE CURE

The family must act swiftly to get a firm grip on their finances, warns Martin Bamford from independent financial adviser (IFA) Informed Choice.

"They've consolidated credit card debt with their mortgage, taken out a personal loan to consolidate more debt – and have racked up another £5,700 on credit cards since then," he says. "This is a recipe for financial disaster."

They must undergo a thorough review of their spending habits, stress our panel of IFAs, and focus on clearing the most expensive debt first. Only when this is under control should they turn to other aspects of their finances.



Debt

"They need to get tough to really understand where their money is going," says Marc Ruse from IFA Fiducia Wealth Management. This means writing down every item of expenditure over a month and drawing up a detailed budget – and sticking to it.

"They need to radically prune their monthly outgoings where possible," stresses Mike Thomas, head of debt advice at DebtWizard.com. "But it's vital that they are absolutely honest when it comes to what they can pay back each month without incurring more debt."

Turning to their "consolidation habit", this is "a short-term solution that fails to tackle the long-term problem," says Mr Bamford. "They need to stop spending on credit cards. If they cannot resist the temptation, cutting up the cards is the only option."

Paying off their credit card debt first is sensible, as this is more expensive than the personal loan. While there is the option to make use of interest-free balance transfer offers – such as Virgin's 15-month deal on its credit card – this risks deterring them from getting back in the black, says Mr Ruse.



Property

Borrowing more than 80 per cent of a property's value is still possible despite the credit squeeze, says Richard Morea from mortgage broker London & Country. "However, almost all of the deals on offer are on far higher rates than Northern Rock's SVR and the cost of switching lenders can be significant."

Arrangement fees of close to £1,000 are commonplace. What's more, there are other administration fees to consider which makes the cost of switching too high for many borrowers.

At present, existing Northern Rock customers are only able to sit on the SVR. "But it plans to take a more active role in the mortgage market, and provide more choice soon," says Mr Morea. Once the Rock does expand its mortgage range, the Quigleys may find that they are allowed to switch to one of the new deals away from their current SVR. However, switching isn't as clear cut a decision as in the past as many lenders' SVRs are now the equal or even slightly better than some of their new offerings, particularly in the fixed-rate mortgage sector. "In the meantime, wiping out unsecured debt will make the Quigleys more attractive to lenders in the future," Mr Morea adds.



Savings

Gary's PepsiCo share scheme may prove profitable over the long term. "But this depends on when the scheme started, and the price at which shares are bought and sold," says Dennis Hall from IFA Yellowtail Financial Planning. The advisers agreed that he might want to consider selling his holding and putting the sum towards repaying debt to help get finances back on an even keel.

In the longer term, the Quigleys need to focus on building up a savings buffer against rainy-day expenses. Advisers estimate that it is good idea for people to have the equivalent of between three and six months income on deposit. It's also important to shield savings from the taxman. Both Amanda and Gary are allowed to save up to £3,600 in a cash individual savings account each tax year. All interest earned in an ISA is automatically free of tax.



Retirement

Pension planning isn't a priority for the family at present. However, Amanda should dig out the details of her old company schemes to see how they're performing and make sure they are invested in funds that match her attitude to risk, says Mr Bamford.

At some point, she may want to take advice on her retirement needs and consider consolidating her various pensions into one single plan with fewer charges.

"Gary needs to do the same as his pension contributions are being paid into a money purchase scheme where he is responsible for how the money is invested," adds Mr Bamford.



Protection

The family has a large sum of life cover, says Mr Ruse. "The minimum level needed is around £150,000 to repay the mortgage and provide some initial capital in the event of premature death." However, they may not feel comfortable decreasing their sum.

Another option is to opt for family income benefit to save money, says Mr Hall. This is a low-cost life cover that provides a fixed income for an agreed period.

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