Wealth Check: 'My living costs are low but I've got huge debts'
Saturday 10 June 2006
Paul Heron, a 39-year-old solicitor from east London, has several financial dilemmas to tackle. Six years ago, he enrolled on a part-time law course at the University of Westminster and finally became fully qualified in January. The legacy from this career change is an £11,000 loan taken out to finance his studies.
This debt dwarfs the savings Paul has made - he has a small emergency fund of around £1,000, but no other investments for the future. Although he contributes £142 a month to a private pension plan, he is concerned that he will not have enough to live on later in life.
The third issue that Paul is keen to tackle is his property situation. He currently pays about £300 a month in rent for a local authority flat in Hackney, which he has the right to purchase. It's probably worth around £130,000, but should he take up the option of buying it?
We asked three independent financial advisers for their counsel: Vivienne Starkey of Equal Partners, Alec Ruthven of AM Ruthven & Associates and Kevin Morgan of Consilium Financial Planning.
Morgan says that one option, if Paul does decide to buy his flat, would be to incorporate the loan within a mortgage. This will mean borrowing more, but even a cheap personal loan is more expensive than a good-value mortgage.
Starkey and Ruthven are both keen to persuade Paul to budget more systematically. Starkey points out that after his fixed monthly outgoings, Paul has quite a decent disposable income left over.
Ruthven says that if Paul could reduce his monthly spending by £200, he could put this towards overpayments on the loan and, in time, towards his savings.
Paul should keep his £1,000 rainy day fund, suggests Morgan, who recommends that he switch the money into a single tax-free cash individual savings account (ISA). National Savings & Investments pays 5.05 per cent currently, he points out.
All the advisers think that Paul will eventually need to save more. For now, however, he will not be able to earn more on savings than he pays on his debt, so getting rid of the latter must be the priority.
Starkey warns Paul that not all lenders will offer mortgages on local authority properties - to get the best deal he should use an independent mortgage broker. Morgan says that the first step for Paul is to approach his local council to find out exactly what - if any - discount on the property he will qualify for under the "Right to Buy" scheme. Once he knows how much he would have to pay to buy the flat, he will be in a better position to talk to lenders.
If the purchase is affordable, Morgan is very positive about the idea. Paul lives in Hackney, he points out, an area set to benefit from infrastructure improvements in the run-up to the 2012 Olympics. It should also be possible to rent out a room in the property, which would help with the mortgage payments.
However, Ruthven sounds a note of caution. He thinks that Paul should give himself a year to get on top of his debt before buying - and attempt to bring down his monthly spending in preparation for the financial discipline that is required for home ownership.
Starkey is concerned that Paul is somewhat vague about the pension provision he is currently making. He must ask the Pension Service for a forecast of his likely State retirement benefits, and also get a similar projection from his current pension provider.
In addition, now is the time to check whether Paul made any pension savings before his change of career. He should not lose touch with deferred pension benefits held on his behalf by previous employers.
Armed with all this information, he can then decide whether he needs - and is able - to increase his pension saving. Ruthven says that a contribution of 5 per cent of salary a month, in addition to any employer's contribution, would be a good initial target for Paul's pension saving.
Morgan says that Paul should also check whether he is currently contracted out of the State Second Pension. If so, he should think about switching back in.
Paul has not mentioned protection products such as life and health insurance, but Starkey says that he needs to think about providing for his son. A life insurance policy, for example, would be crucial if he does not qualify for death-in-service benefits at work. Income protection insurance would pay out if Paul was unable to work due to a prolonged period of ill-health.
Paul Heron, 39, solicitor, London
Salary: about £30,000 a year.
Monthly spending: £300 a month rent and £150 financial support for his 14 year-old son. Bills and spending amount to £1,200 - wiping out his disposable income.
Savings: £1,000 spread across three savings accounts.
Debt: £11,000 loan to finance law school studies.
Property: local authority flat.
Pension: £140 a month.
- 1 Home Office says Nigerian asylum-seeker can’t be a lesbian as she’s got children
- 2 What happens to your body when you give up sugar?
- 3 Drugs Live cannabis trial: Hash is less harmful than any other drug, expert claims
- 4 Turkish Airlines flight TK 726 crash-lands on Nepal runway amid dense fog
- 5 Apple and Google users being spied on for a decade because of 'Freak' security flaw
Durham Free School: 'Creationism taught at' free school facing closure
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
Ukip would cut billions from Scottish budget to fund English tax cuts
End of the licence fee: BBC to back radical overhaul of how it is funded
Ukraine crisis: Top Chinese diplomat backs Putin and says West should 'abandon zero-sum mentality'
Boris Nemtsov shot dead: Outspoken Putin critic who had expressed fears for his life is killed near the Kremlin
iJobs Money & Business
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...
£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...
£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads