Wealth Check: 'I want to buy a home and take a year out'

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Fiona Fulton, 22, from South London, is already on the property ladder having invested in a house with her sister using money from an inheritance. She wants to buy a house of her own in the next few years, but is worried that the pressures of repaying a mortgage will make her ambition of taking a year out to go travelling impossible. Fiona says "as my goal is to invest in property I am not sure if it is viable to take time out to go travelling."

Case notes

Salary: 21,000 pa as an accounts assistant
Assets: 48 per cent of a house in South London which she owns with her sister. It has a 180,000 mortgage.
Monthly outgoings: 265 for her mortgage, 165 for bills and home improvements, about 500 for living expenses.
Savings: Fiona puts 100 a month into a cash ISA, which is currently at 900.
Debts: A student loan, which has yet to be fully repaid.

Offering advice this week are Danny Cox of Hargreaves Lansdown, Robin Keyte of Towers of Taunton and Chris Wicks of N-Trust...

Travel

Fiona is in a good position for someone of her age, as she is already on the property ladder and has debts under control, but achieving her aim of taking a year out of work to go travelling seems to be difficult.

Robin Keyte says that the objective "is in direct conflict with Fiona's goals of maintaining her existing mortgage and buying her own place in five years' time." He suggests a "busman's trip around the world"; working to fund her travels. He adds: "I would suggest planning on renting out her place while she is away so the mortgage is paid, and making further savings into her cash ISA to provide the cash sum she requires for her travels."

Chris Wicks also suggests subsidising the cost of her travels: "Fiona may be able to help with the costs of the gap year by working, for example by teaching English as a Foreign Language for which you can take training, or go as a VSO volunteer on a local wage."

Savings

Mr Keyte praises Fiona for her savings regime: "It is an excellent discipline she has established." Danny Cox adds: "The more that Fiona can save, the harder her savings will work. It is therefore important for her to find the most competitive rates . Various building societies are offering about 3 per cent on cash ISAs including the Newcastle and Chesham. As interest rates rise, these rates should improve."

Mr Cox says: "If Fiona continues to save at the current rate, after five years, assuming 3 per cent interest rates, her savings pot will grow to 7,518, Fiona has to balance the enjoyment of socialising and spending now, with achieving her goals in five years. Saving an extra 50 a month could increase her savings by 3,000 in five years."

Fiona has recently been promoted with a 2,000 pay rise, starting in a month's time. Mr Keyte suggests that working towards increasing her salary further will help her achieve her financial goals. He says: "Fiona should invest time now in work-related qualifications with a view to generating a higher earnings in the future."

Mr Wicks suggests that Fiona look at her current living costs to increase her savings. "The starting point is to keep a good track on where money is going. If she is serious about saving there will be 'frivolous' areas of expenditure which she may want to cut back on, especially when she finds out how much she actually spends on them." For household bills he suggests that Fiona should "always shop around at renewal as she will be surprised how much she can save."

Mortgage

Mr Cox stresses the importance of repaying her mortgage. "Fiona's mortgage is an interest-only type meaning that the amount of the capital will not decrease over the next five years. Fiona needs to have a mortgage repayment plan. It is understandable to have an interest-only mortgage at this stage as money is tight. However, many people retain interest-only mortgages for too long and without thought of how they are going to repay the debt."

Mr Keyte agrees. "I suggest that Fiona gives serious consideration to paying off her mortgage as a form of saving/investing. Most mortgage deals allow payments of up to 10 per cent of the loan capital each year without charge, though you should enquire with the mortgage provider to check there are no hidden charges. The gross return she will receive on each capital overpayment is 3.53 per cent by way of the interest being saved. Mortgage payments become even more compelling as mortgage interest rates go up. The end result should be that she has the use of more equity when she comes to sell her property in five years time."

Mr Cox offers an alternative to beginning to pay her loan capital immediately. "The alternative is to run a savings plan alongside an interest-only mortgage, investing in stock market funds. This strategy is more risky: if the stock market performs well the savings plan could produce bumper returns, either enabling the mortgage to be paid off early, or providing an additional lump sum. On the other hand if the stock market does not perform, there may not be sufficient to repay the mortgage at the end of the term."

Pension

Mr Keyte says that Fiona should start thinking about her pension provision. "Pension funding relies on the long-term effects of compound growth so it is never too soon to look into pension planning. The ideal solution for Fiona would be an employer-sponsored pension scheme so the cost burden of pension planning is shared. A useful rule of thumb is that overall contributions (from both employer and employee) should be 10 per cent or more of salary. Also, given her age and that any pension investments will probably be invested for up to 40 years, I would suggest investing mostly in shares."

Mr Cox agrees: "Pensions are one of the most tax efficient ways of saving and should probably form part of almost everyone's plans. Fiona should join a pension scheme as soon as possible, to benefit from that contribution."

For a free financial check-up, write to Wealth Check, The Independent, 2 Derry Street, London W8 5HF; or email wealthcheck@independent.co.uk

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