Wealth Check: In debt but in a hurry to get on the ladder

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


The patient

The patient

Nick Gentry, 24, from north London.
Job: graphic designer.
Income: £23,000.
Savings: £1,100 in a monthly saver account and £400 in a mini cash ISA.
Investments: £200 in BT shares.
Goal: to build up substantial savings and clamber on to the property ladder with a cheap mortgage.

The problem

Nick Gentry has been weighed down by a hefty student loan since graduating from university three years ago - and still has £12,000 to pay off.

His debt is stifling two ambitions: saving enough for a sizeable deposit on a first home and being able to travel each year.

He has recently moved into a rented three-bedroom house with two friends in Highbury, north London.

Nick pays £500 rent each month - not including bills - and wants to stop doing this as soon as possible. "Over a long period, I don't think it makes financial sense to rent," he says.

He is looking to buy a property on his own for no more than £160,000. And, in the longer term, he has his eyes on investing in an overseas property, perhaps a flat in Paris.

Despite his debts, Nick is determined to make headway with some savings. After depositing an initial £500 into Abbey's fixed-rate monthly saver account in September, he now pays in £200 a month.

"I've saved £1,100 so far and the account lasts for a year with a 7 per cent interest rate," he says. "By the end of next year I'll have at least £3,000 set aside for a deposit on a house."

Nick has also put £400 into a mini cash individual savings account (ISA) with HSBC. This pays 4.35 per cent.

Nick is determined to avoid personal loans until his student debt is fully repaid. He has an HSBC credit card to fund his holidays but pays the balance off in full every month.

Currently without a pension, he is keen to set one up in the next five years. His employer provides him with basic life insurance and health cover.

Loan alone: focus on clearing the £12,000

The cure

Nick must wipe out his debts before even thinking about funding a pension and buying a house, says Kevin Tooze of independent financial adviser (IFA) Equal Partners. "He has some sensible goals but certain fundamentals - the student loan - should take precedence."

Patrick Connolly from IFA John Scott & Partners says Nick needs to be realistic about what he wants to achieve. "For a deposit on a home, he is taking the right approach by building up cash deposits." However, he adds, short-term sacrifices will have to be made in areas such as his travel plans.

Debt

Mr Tooze warns Nick to beware of the interest accruing on his student loan. This currently stands at 2.6 per cent.

Nick should consider using some of the money set aside for savings to make [over] payments to whittle away at this instead, says Meera Patel at IFA Hargreaves Lansdown.

"He stands a better chance of getting a mortgage if he has very little debt," she adds.

Savings

Mr Connolly says Nick has taken a sensible approach by opting for a competitive savings account as well as using his mini cash ISA allowance. But he should monitor the rate on the Abbey account in case it drops at the end of the year, he warns.

Given that mini cash ISAs offer tax-free savings, Nick ought to be considering putting more money into them. Although HSBC pays a respectable 4.35 per cent, Mr Tooze points out that Abbey's no-notice postal cash ISA currently pays 5.35 per cent.

"This would be a good place for Nick to continue to build his deposit."

Property

Renting may well be the equivalent of throwing money into the wind, but it is a good option for the time being, says Ms Patel.

She urges Nick to wait and see if prices in the overheated property market cool down over the next two or three years before buying.

Mr Tooze is concerned that Nick is putting undue pressure on himself. "He should take a step back to plan his goals and work towards a greater salary and debt-free position before considering a property purchase," he says.

Pension

Nick's thoughts of holding back on longer-term saving are understandable, according to Mr Connolly.

"But he will need to be careful he does not keep delaying this and then find himself with too much catching up to do," he adds.

Nick should consider taking out a personal pension if his employer does not offer one, says Ms Patel.

"He doesn't need to save a lot of money, but what he can save in the early days will be worthwhile later on in life," she adds.

"A stakeholder pension [with low charges] from an insurance company such as Standard Life could be one option. Alternatively, he may wish to invest in a self-invested personal pension (Sipp), which he can do at low cost."

Investments

Putting money directly into individual shares is a high-risk strategy, warns Ms Patel.

Instead, Nick could consider cashing in the BT shares to help make a further dent in his student loan.

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

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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