Wealth Check: 'I'm overdrawn by the middle of each month'

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The Independent Online

Gill Getz lives and works in London and looks after her two children. Despite having a good income, Gill finds balancing private education and a busy lifestyle means she is usually £1,500 overdrawn by the middle of every month.

Gill Getz lives and works in London and looks after her two children. Despite having a good income, Gill finds balancing private education and a busy lifestyle means she is usually £1,500 overdrawn by the middle of every month.

She has rolled all her overdraft on to a credit card at a zero per cent interest rate for the next six months - she is currently paying off £250 each month. Her mortgage of £194,000 is on a repayment basis and there are no penalties for switching to a new provider.

Gill owes her ex-husband £50,000 following the purchase of his share of the family home. This debt is to be repaid in chunks of £20,000 each October and the recent further advance of £30,000 on the mortgage was taken to make the payment in October 2004.

Gill is a member of a company pension scheme - she and her ex-husband are the only two members. The pension fund owns the couple's business premises, valued at approximately £500,000 and is split 50:50 between them. Gill wants to know how she can consolidate her debts without falling further into the red.

We put Gill's case to three independent financial advisers: Lee Bailey at Brooks Macdonald Group, Geoff Tresman at Punter Southall Financial Management and Marc Ruse at Swallow Financial Planning..

Spending

Gill does not seem sure of how all of her income is spent says Bailey. There are a couple of items of expenditure that seem high - gym membership, car costs and insurance - and could certainly be reduced to improve her budget. She needs to set a realistic budget.

Ruse says anyone who is in the position where their bank balance isn't growing each month must look carefully at their spending and income. Tresman says Gill needs to avoid any further credit card spending. Her main priority, he says, must be to consolidate all her liabilities and avoid increasing that debt.

Debt

Bailey says that, in the short term, Gill could switch to an interest-only mortgage. Lambeth Building Society is currently offering a discounted rate of 4.49 per cent until 31 July 2007. This would reduce the monthly payment on an interest-only mortgage of £194,057 to £726, a saving of £446.

In fact, Gill could consider consolidating all her debts under a single mortgage. The monthly repayment on an interest-only mortgage of £254,057 would be £950. This equates to a total monthly saving of £472 and also removes the need to make the repayments to her ex-husband in October for the next few years.

Tresman suggests Gill negotiates with her ex-husband for a settlement of the £50,000 - he may be happy to accept a lump sum payment of a lower amount. If Gill remortgages her house for a total of £250,000, she could draw down £194,000 immediately and take a further £10,000 in six months when the interest deal on the credit card expires. She could take out more money to meet the October payment to her husband.

Ruse also points out that an offset mortgage arranged on an interest-only basis would save thousands. The argument against this approach would be that when Gill reaches the end of her working career she will have no means to repay the outstanding capital.

Pension

Ruse says Gill needs to look carefully at her pension plan. In a small business scheme, her entitlement to tax-free cash may currently exceed 25 per cent of the fund, which will be the limit after pension reforms due to come in next April.

Tresman says Gill could consider diverting the pension contribution for her personal use. This may help cover immediate shortfalls.

In the longer term, Tresman suggests making regular contributions to an individual savings account with a view to building up a fund outside her pension. This money can be used to provide additional income or to repay the mortgage.

Currently, retirement provision is not Gill's main concern as the contributions being made by her business are relatively high and there is no need for personal contributions. But Bailey says she should be concerned about the scheme's lack of diversification - it is invested entirely in the business property.

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