Wealth Check: 'How can I save now I've got a mortgage?'

Each week we give 'Independent on Sunday' readers a financial makeover

The problem

"I have around £5,000 in savings but this is about to be swallowed up by a flat deposit, legal fees and stamp duty," says Laura Hogg. The 23-year-old is buying a home just outside Norwich for £91,500. As her deposit is small, she has had to take out a repayment mortgage for £88,755 - 97 per cent of the flat's value.

The deal is on a first-time buyer rate from the Halifax, fixed for three years at 5.5 per cent, and her monthly repayments work out at about £540.

"Now I've bought this property, I need to bed my finances down and start to save," says Laura. "That £5,000 will go, though, and I won't have anything left. I guess I should have an emergency savings fund but don't know where to start."

To manage her money, Laura has two Gold current accounts with Norwich & Peterborough (N&P): each month, her salary is paid into one account to pay off bills, before she switches what remains into the other, "fun" account. Any money left at the end of the month is earmarked for savings, but "there isn't usually much left".

She owes £900 on a Cahoot credit card charging 9.3 per cent and tries to pay off £50 to £100 each month. However, she has fallen behind because of the upheaval of moving.

Each month she also pays £200 to Ford on a hire purchase deal that gives her a new car every two years.

Laura has already begun to save for her future. She has three years' worth of pension savings from a former job at N&P - a final salary deal where she paid in 5 per cent of her salary. She is unsure whether to leave it, cash it in or transfer it over to her new final salary pension scheme at Norwich Union (NU).

She is considering buying life cover with her new firm to benefit from special staff rates but has neither income protection or critical illness cover.

Interview by Sam Dunn

The patient

Laura Hogg, 23, lives near Norwich.

Job: editor of the in-house magazine for insurer Norwich Union.

Income: £26,000.

Savings: £5,000 in Head Start, the young saver account at Norwich & Peterborough.

Investments: none.

Goal: to keep a tight rein on spending as she settles into her first home.

The cure

"Laura is an example of the financial challenge facing young people who want to buy a home," says Nick McBreen at independent financial adviser (IFA) Worldwide Financial Planning. And although her budget will be tight, she needs to build up an emergency savings fund and shift her credit card debt to a better deal, advises Darius McDermott, managing director of IFA Chelsea Financial Services.

The car is also a questionable asset given its high cost, and at her age, protection is less of a priority than saving.

Debt

Laura should move the balance on her Cahoot card to one charging 0 per cent on transfers for an introductory period. This will enable her to clear the balance instead of just paying off the interest, says Ben Gibbs at IFA Glazers. The Halifax's One Visa card is offering 0 per cent for nine months before reverting to 9.9 per cent - which should give Laura plenty of time.

Mr McBreen says she could make big savings by running a cheaper, second-hand car.

Savings

Making regular monthly payments into a mini cash individual savings account is a good way to start building up an emergency reserve, says Mr McDermott. Abbey offers 4.6 per cent and Marks & Spencer 4.5 per cent.

Laura could also get a very competitive rate on an internet savings account, including 4.3 per cent with Halifax's websaver.

Property

Laura could have opted for a lower discounted variable mortgage rate, but by going for a fixed deal she's removed the risk of higher payments if the base rate rises, says Mr Gibbs. "She has a large loan relative to the property's value, but if her income and the value of her flat rise significantly over the next few years, she will have more flexibility to review her mortgage."

Retirement

Final salary schemes are "like gold dust", says Mr McDermott, and Laura should join the NU scheme quickly and invest as much as possible.

As for her old scheme, the transfer process is complicated and lengthy. "Her best course of action would be to leave the N&P pension [pot] where it is and let it grow," adds Mr McDermott

Protection

Laura should check whether her pension also carries other benefits; some employers offer policies such as income protection, says Mr McBreen. If not, she should consider taking out income protection in case she suffers a serious illness.

Laura could generate £13,000 of income a year for a premium of £9.02 a month with Liverpool Victoria. She would need this to start paying out when statutory sick pay comes to an end (up to 28 weeks after she contracts an illness).

However, Mr McDermott says insurance shouldn't be her priority. "Given her age, I would encourage her to save rather than pay protection premiums that she can't afford." She doesn't need life insurance to cover her mortgage as she has no financial dependants.

If you would like a financial makeover, write to Melanie Bien at the Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS, or email m.bien@independent.co.uk

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