Wealth Check: He's already deep in debt and the tide is coming in

It's no time to have a big mortgage and big loans, so how can Ben Anderson lighten the burden? By Harriet Meyer
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The Independent Online

THE PATIENT

Ben Anderson, 31, fears he will be a victim of the credit crunch. He is saddled with £36,000 of debt alongside a hefty mortgage after stretching his finances to buy his first home when prices were at their peak.

He pays £1,599 a month on a 25-year £237,450 repayment mortgage with Northern Rock, fixed at 6.35 per cent for two years. To get a foot on the first rung of the property ladder, he borrowed 95 per cent of the value of his one-bed flat, bought in August last year for £249,950.

To meet stamp duty, legal fees and other property purchase costs, he took an additional £30,000 unsecured loan under Northern Rock's controversial "supersized" Together mortgage. "I pay £199 a month for this, at the same rate as my home loan, but this switches to the standard loan rate at the end of the deal, which will see payments shooting up. I worry I will find it difficult to move this debt if I still have a lot to pay off then."

This isn't the only debt burden for Ben, who earns £77,000 as a database administrator for an information technology company.

He also pays £450 a month for a £6,000 personal loan with Royal Bank of Scotland at 9 per cent, with 18 months remaining on the agreement. "I took this out as I was really overdrawn at the time and wanted to clear my credit card debt."

Ben currently has £1,800 on a Barclaycard One Pulse card – an interest-free deal until September for balance transfers and purchases. "I also hold an Amex Gold, Royal Bank of Scotland Platinum and Morgan Stanley Platinum card, all on various interest-free deals. I have nothing on them at the moment," he adds.

For short-term savings, Ben has £1,000 in premium bonds, but after servicing his debts, he has no spare cash to top these up or put anything into other accounts. "I'm no good at leaving money in easy access accounts, which is why I picked premium bonds: they are hard to cash in."

Ben has no retirement plan in place. "I hear too many bad things about pensions," he says. "As I don't have one, I'd like to be able to commit to a long-term investment plan that can grow over time."



THE CURE

Ben earns a high salary, but with large sums of debt and the spectre of negative equity in a sinking property market, he faces an uphill struggle to get his finances on an even keel.

"The size of his mortgage versus the value of his property could see Ben in quite a predicament when his current deal ends," warns Dan Clayden of the independent financial adviser (IFA) Clayden Associates.

However, after mortgage repayments and living costs, he should have some £1,500 a month to focus on reducing his debts and improving his financial situation.



Debt

Ben would be wise to use the £1,000 in premium bonds to pay off some of the debt on the Barclaycard, says Mr Kidd. While this is currently on an interest-free deal, the rate will soar to 19.9 per cent from September, so he should aim to clear it by then.

He should then scan his recent bank statements to see where money could be saved, and put this towards paying down his overall debt, says Adrian Kidd from IFA Mint Financial Services.

It is vital that he maintains repayments on his unsecured loans and overpays when possible to give him the greatest chance of securing good rates in the future, comments Neil Munroe from Equifax, the credit-reference agency. "Any minor indiscretion in the current climate could cost him several percentage points in interest with lenders," he adds.

But Keith Churchouse from IFA Churchouse Financial Planning says Ben should check for any redemption penalties on the Royal Bank of Scotland and Northern Rock loans, as he could be charged for overpaying if he clears the debt ahead of schedule.



Savings/investments

Ben should not be slotting away much in savings until he has his borrowings under control, stresses Mr Kidd. "Any surplus income should be used to pay down debt, and he is only 31 so has time on his side. But he will need to make substantial savings further down the line."

However, Mr Clayden recommends he consider a tax-free cash individual savings account (ISA) as a short-term "emergency fund" and a stocks and shares ISA as an investment that will bring greater returns in the long run. Premium bond prizes may be tax-free, but there is no guarantee Ben will strike lucky.



Property

Ben's mortgage with Northern Rock, the best-known casualty of the credit crunch so far, is due to end in August 2009. "The Rock is actively looking to reduce its mortgage book and has come to an arrangement with Lloyds TSB to offer customers an alternative mortgage at the end of their fixed rate," says Mr Clayden.

He wouldn't be able to remortgage today, the advisers warn, because of the tighter criteria being applied by lenders. "Hopefully the situation for borrowers will improve by next year," says Mr Kidd. "But if it's still bleak and house prices continue to sink, his only option may be a much higher mortgage rate."

Once other debts have been tackled, Ben should make overpayments to reduce his mortgage term and the interest paid, adds Mr Churchouse. It would also be sensible to consult a mortgage broker, who can scour the whole market several months before his deal ends to boost his chances of finding another offer.



Retirement

While Ben is sceptical about pensions – and he has other financial priorities at the moment anyway – they do offer higher-rate taxpayers an attractive means of planning for retirement.

He should check to see if his company offers a scheme and makes contributions on behalf of its staff. If not, he should open a stakeholder pension with a provider like Friends Provident as soon as possible. Payments can be started from as little as £20 a month. "But if he paid in, say, £250, this would come to £312.50 once the tax relief was added," says Mr Churchouse.

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