Justin Westcott, 27, lives in a flat in Clapham, south London, that he bought six months ago. Although he earns a decent salary, the £179,500 purchase price left him stretched, and his mortgage is set up on an interest-only basis. That makes the monthly payments more affordable but the capital he owes is not being repaid.
Justin is also concerned because he doesn't have the money to pay a £10,000 service charge due in 18 months for new double-glazing that he was required to install shortly after moving into his new home.
Saving for a pension is Justin's final financial priority - currently he has no retirement savings.
We asked three firms of financial advisers - Chase de Vere, Hargreaves Lansdown, and John Scott & Partners - for their help.
Personal: Justin works in public relations and earns between £30,000 and £40,000 a year
Savings: £500 in online account, no investments or pension
Mortgage: £162,000 Northern Rock loan, costing 5.99 per cent a year
Debt: £1,300 on NatWest credit card; £8,000 car loan costing £179 a month
MORTGAGE AND DEBT
"Getting the mortgage sorted is the top priority," says Hargreaves Lansdown's Ben Yearsley. "His options are to change to a repayment mortgage or to start a savings plan such as an ISA, to cover the mortgage capital when it falls due."
If Justin puts £200 a month into a stocks-and-shares ISA, Yearsley points out, he will still be allowed to open a cash ISA, which could be a good savings vehicle for other needs, such as rainy-day cash and the double glazing bill.
With 23 years to go until the mortgage is due to be repaid, a stock market ISA could be a good bet, Yearsley says. "Equity income funds make a decent start as they tend to invest in UK-based, profitable, dividend-paying companies."
There is, of course, a risk that an ISA might not grow sufficiently to repay the mortgage, though Justin will be able to monitor performance as time goes by. But the total monthly payments using this model will be smaller than if Justin switches to a straightforward repayment mortgage.
Patrick Connolly of John Scott adds: "The initial focus should be to pay off the debt where the highest interest is charged - either the car loan or the credit card." While Justin is understandably worried about the cost of the double glazing, there's no point saving money if he earns a lower rate of interest on the cash than he pays on his debt.
At the very least, Connolly suggests, Justin must consider cheap credit-card deals such as 0 per cent offers and move his NatWest account.
"Raising £10,000 won't be easy, and the only option may be to take out another loan, maybe added to the mortgage as the money was spent on home improvements" says Susan Hannums of Chase de Vere. "Justin should also put as much as he can into a high-paying savings account, such as the Halifax Regular Savings deal that pays 7 per cent for a year."
Juggling these demands won't be easy, Hannums adds, and Justin must start by becoming more organised about his money.
"Budgets are not necessarily just about cutting back or saving money but just monitoring your money is important," says Hannums. "This shouldn't stop him going out or buying clothes, say, but if Justin can put by a set amount each month to spend on these luxuries, he will be much less likely to overspend."
Hannums' colleague Anna Bowes says there are low-cost pensions that could make a good starting point for Justin as he begins thinking about saving for old age.
"A stakeholder pension could be right for Justin, if he chooses one with a good choice of funds, such as Legal & General or Standard Life," she says. These plans will allow Justin to make contributions of as little as £20 a month, though Bowes suggests he tries to save a little more if he can possibly find the money.
Yearsley adds: "As a broad rule of thumb, you should save half your age as a percentage of your salary each year." In other words, he says, Justin should be saving around 13.5 per cent of his salary, which equates, after tax relief, to around £240 a month.
This may not be realistic while Justin is also saving for the cost of the double glazing and thinking about his mortgage, but the early pension money can be saved, the more it will produce in old age.
Yearsley says it is important for Justin not to become over-anxious. "He is in a relatively decent position, with a good salary, not much debt apart from the mortgage and still under the age of 30," he adds.
However, one additional area the financial adviser believes Justin must address is protection. Currently, he has no insurance that would pay out if he was unable to work due to ill-health or an accident.Reuse content