Wealth Check: 'I really want to be mortgage-free by the time I'm 50'

Jonathan Durnell, 26, is in the process of buying his own house, but even before the sale has been completed, he has plans to move on. "I would like to move out of London in about four years, keeping the London house to rent out, and buying again in the South-west," he says. "And I'd like to be mortgage free by the time I'm 50." But Jonathan still has student debts, and has yet to save any money for his retirement.

Case notes

Jonathan Durnell, 26, engineer, London
Income: Jonathan earns around £25,000 as a geotechnical engineer.
Monthly spending: About £800 on living expenses including rent and bills, and £250 on other everyday costs.
Savings: £10,000 for property costs and a cash ISA.
Pension: £0
Mortgage: Jonathan is about to buy a £200,000 property with his girlfriend, and will pay 5.8 per cent on his 25-year mortgage loan
Debts: Jonathan has few expensive debts, but owes £14,000 on a student loan and about £2,000 on a career development loan.

Three independent financial advisers offer Jonathan help this week: Mel Kenny, from Radcliffe & Newlands, Mark Wapshott of St Edmundsbury Financial Services, and Kevin Anderson from Budge and Co.

Property

Jonathan and his girlfriend are looking forward to moving from rented accommodation into their first home, but despite Jonathan's plans for the future, the advisers warn that the rental market may not always be robust, and that he may wish to think about other investment opportunities.

"When Jonathan is looking for his next property in four years, the housing market will look very different than it does now," says Kenny. "As things stand, there is a strong rental market for investors but there are many possible threats, including the loss of renting foreign workers who find that the weak pound isn't worth it and return home. There is also a growing supply of competing rental properties on the market."

Jonathan may find that his investments end up being purely in property, leaving him heavily exposed if the market takes another tumble. Jonathan needs to remember that the property he lives in is also an asset. The advisers recommend diversifying his investment portfolio further to protect him from being too dependant on the fortunes of one market.

Meanwhile, Wapshott adds that others looking for first homes may wish to delay purchasing a property until the effects of the latest stamp duty and Government loan announcements come into effect. "The stamp duty threshold has now increased from £125,000 to £175,000," he says. "This means that properties just above the limit will be held back or re-priced to appeal to first-time buyers.

"If the property is a new build, first-time buyers with a household income of £60,000 or less can borrow up to 30 per cent of the property value for five years, interest-free."

Meanwhile, as a homeowner Jonathan will have to honour the payments on his mortgage if he wants to keep a roof over his head, even if he becomes ill and cannot work. "Jonathan should think about an income protection policy," Anderson advises. "This will provide him with income if he is unable to work through illness or injury for a long period. And he should find out from his employer what his circumstances would be if he was to be off work long-term." The advisers also urge Jonathan and his partner to make a will.

Pension

Jonathan has no pension provision as yet, but has plans to join his stakeholder pension scheme through his employer. Anderson warns that, at the moment, Jonathan's hopes to retire on an income of £2,500 a month may be unrealistic. "Based on current annuity rates, Jonathan's hopes for £2,500 a month in retirement will require a fund of £500,000 in today's terms. He may have to reappraise his expectations in light of affordability," he says.

"To reach his retirement goals, Jonathan should be setting aside £450 a month every month into a pension," adds Kenny. "And if he wants to retire early at 55, he will have to be putting away some £900 a month." But on the positive side, Kenny adds that Jonathan's state pension would also be worth £4,716 every year: "And with the current stock market volatility, Jonathan's regular contributions currently buy him more of a stake in an equity fund because the prices are low."

Savings & Investment

Jonathan is concerned about his debts, but he has a low rate of interest on his student loan and has avoided high-charging debt like credit cards. This means that he can afford to save his money rather than paying off his debts, as he will earn more on savings than he will spend on debt interest. "Cash ISAs are a very attractive way of saving, with tax-free limits of £3,600 and few penalties," says Anderson. Jonathan has an ISA but he should ensure that he takes advantage of his tax-free saving option every year, the advisers urge. And with the recent changes to stamp duty, he may also find that he spends less of his £10,000-worth of savings set aside for property costs.

To find an independent financial adviser in your area, visit www.unbiased.co.uk

For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS; or email cash@independent.co.uk

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