Wealth Check: 'How can I manage a mortgage?'

Each week we give 'IoS' readers a financial makeover
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The problem

The problem

For the past few years, Caroline Byrne has been living almost rent-free under her parents' roof. But this will all change when they move to Ireland - leaving her in charge of the mortgage.

Caroline is worried about how she will cope with the extra burden of mortgage repayments, as she is already struggling to live within her means.

She will take over the interest-only Halifax mortgage on the four-bedroom property in three months' time, and while the house will remain in her parents' name initially, it will be signed over to her after a year.

Her parents have been paying off the mortgage for 27 years, and repayments are currently just under £600 a month.

"It's going to be quite a strain financially," she says. "I'm hoping to get a lodger in to help me with the extra expense."

Caroline's other priority is to start paying into a pension. She wants to be able to contribute £60 a month - the minimum she can put into her employer's scheme. "I'm worried how I'm going to afford this as well as the added cost of the mortgage."

Caroline has £2,000 in an Abbey mini cash individual savings account (ISA) but carries debts on two credit cards and has £4,000 left to pay on a £10,000 personal loan with Egg.

She currently makes the minimum payments on her MBNA Visa card and Capital One Mastercard, amounting to £70 to £90 a month.

"I tend to spend what I earn, and often find I run out of money by the middle of the month," she says. "That's when I resort to using my credit cards - as well as when there's something I really want. At the moment, I don't see how I'm going to ever get these cards paid off."

She says she wants to get her finances under control. "I'd just like to know exactly how much I owed each month, and to be able to pay one fixed amount. I'd like not to have to worry so much about my money and would like to see it working better for me."

Interview by Esther Shaw

The patient

Caroline Byrne, 25, from south London.

Job: sales team leader for a financial information company.

Income: £23,000.

Savings: £2,000 in a mini cash ISA.

Investments: none.

Goal: to get her finances under control so she can take over her parents' mortgage and start saving into a pension.

The cure

"Before Caroline can make any progress on the mortgage repayments, she must make a list of her outgoings," says Vivienne Starkey from independent financial adviser (IFA) Equal Partners. "She needs to be brutally honest about this so she can see where her money is going. Then she can prioritise her debts and cut out unnecessary expenditure."

Michael Brill from IFA Baronworth says Caroline should address these immediate issues before worrying about a pension.

Property

"She should ask her parents to look into remortgaging the home in order to obtain a lower interest rate," advises Mr Brill. "There are some very competitive remortgage deals on a 'fee-free' basis."

He recommends extending the mortgage term over as long a period as possible, and consolidating the £4,000 personal loan by adding it to the mortgage. But in the long term, he warns, these moves will mean the total amount of interest will be much higher.

"Once her finances improve, Caroline could pay additional amounts off the mortgage." he says. "But she must check these are penalty free."

Caroline could also benefit from the Government's "rent a room" scheme, which is exempt from income tax, says Danny Cox at IFA Hargreaves Lansdown. "This would allow her to let the spare room out for up to £4,250 a year without any tax liability. This money would reduce the net cost of the mortgage, alleviate the current cashflow problem, and put a repayment plan in place."

Savings and debts

Caroline could cash in her Abbey ISA to pay off her credit cards, says Mr Cox. "The monthly interest she is paying on her plastic is probably far higher than [the interest] she will be making on her ISA."

She should also consider consolidating her personal loan and credit cards into one lower-cost loan - there are plenty of competitive deals available. Alternatively, she could transfer her balances to a credit card with a 0 per cent introductory rate.

Retirement

Regardless of how tight her financial situation is, Caroline needs to start making contributions into a pension sooner rather than later, says Ms Starkey. But first things first: "She must get her finances under control. There is little point in contributing to a pension if it means her debts are going to increase in the process."

Since her employer is prepared to match her own contribution, Caroline should think about knuckling down as soon as she can.

"By remaining out of the scheme, she is, in effect, giving up £60 a month of the firm's money," Ms Starkey adds.

Protection

Mr Cox says Caroline should make sure her income is protected against illness.

But before paying for an income protection policy, he adds, Caroline must first check whether she has insurance already through her employer.

If you would like a financial 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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