Wealth Check: The deposit dream looks a long way off

We give 'Independent on Sunday' readers a financial makeover
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The problem

The problem

Jonpaul Hedge is struggling to save for a deposit on a house. That's no easy feat for a first-time buyer in Devon, where property prices are high - thanks to an influx of outsiders buying second homes - but salaries tend to be low, on average around £19,000.

For the past eight months, Jonpaul has been renting a two-bedroom property where he pays £250 a month not including bills.

By choosing relatively cheap accommodation, and being frugal in his energy use, he has managed to get saving. He has £1,000 in an ING Direct account, paying 5 per cent, and £200 in premium bonds with National Savings & Investments.

His only debt is £1,250 worth of outstanding student loans, although he is chipping away at this by repaying £70 a month. He has no credit cards and rarely dips into his overdraft.

"I would much rather save up for things than go into debt to pay for them," says Jonpaul.

He hopes this attitude will help him on to the property ladder but believes the market may have to crash before he can realistically get a look in.

A writer who puts together company literature, he has been a member of a final salary pension scheme for two years and pays in £40 a month.

"I'd like to save enough for a deposit and perhaps go travelling in a few years," he says. "But my efforts are often thwarted by more pressing expenses, such as a new car."

Interview: Esther Shaw

The patient

Jonpaul Hedge, 26, from south Devon.

Job: company writer.

Income: £16,500 a year.

Savings: £1,000 in a bank account; £200 in premium bonds.

Investments: none.

Goal: to build up savings for a first home, and go travelling.

The cure

Jonpaul needs to explore more tax-efficient ways of boosting his resources, says Jennifer Storrow at independent financial adviser (IFA) Gee & Co. Up to £3,000 in savings can be put aside tax-free each year in a mini cash individual savings account (ISA). Choosing an instant access version will let Jonpaul draw on his funds without penalty in an emergency.

Savings

Premium bonds don't win any prizes with Justin Modray of IFA Bestinvest. A £1 investment in one bond, he says, gives you odds of winning any prize of 24,000 to one. Meanwhile, the money won't earn any interest and will be exposed to the ravages of inflation.

Matt Pitcher of IFA Towry Law says that unless Jonpaul really thinks he will win big - and the odds of scooping the £1m jackpot are 25 billion to one - he should go elsewhere. Mini cash ISAs are a better bet; Abbey's postal cash option earns 5.35 per cent, payable yearly.

But if Jonpaul thinks he might need to withdraw cash several times a year, he could be better off with an account paying monthly interest, adds Mr Pitcher. First Direct's e-ISA offers 6.08 per cent until October, when it slips to 4.27 per cent.

Debts

Student loans are in effect interest-free because the interest charged on them is equal to the rate of inflation. For this reason, Jonpaul should be in no rush to pay off the loan, says Mr Modray.

Investments

People who invest in the stock markets should be prepared to tie money up for five to 10 years, says Mr Modray. "As he wishes to buy a property and travel later, he should stick to cash savings."

Property

Jonpaul should consider other ways of buying, such as shared ownership schemes that let you buy a stake in a property through a local housing association while also paying it rent. "The need for capital as a deposit is reduced, as is the size of the loan," says Ms Storrow.

Other methods include buying with friends or a guarantor mortgage, where parents pledge to step in if problems arise meeting repayments, so allowing a bigger loan to be taken out.

Retirement

Jonpaul is fortunate to be a member of a final salary scheme, where pension is based on salary and time in the job rather than stock market performance, says Mr Modray. "If he stays in the scheme until retirement, he will probably be better off than most of the population."

However likely this is, Mr Pitcher agrees that Jonpaul should stick with his current pension scheme for as long as possible - ensuring his contributions stay at the maximum allowable as his salary increases.

Protection

Without financial dependants, Jonpaul has little need for life cover, says Mr Modray, but he should ask his employer how long he will be paid if he is sick for an extended period.

Ms Storrow suggests he consider income protection in the event of a serious injury that puts him out of work. But Mr Modray says these plans are not cheap and could be beyond his budget.

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

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