Wealth check: The family is growing but the biggest bump is the mortgage

The patients

Another addition to the family is on the way and Paul Cockerton, 38, and Stephanie Dartinet, 35, are keen to get their finances in order.

Stephanie, originally from Dijon in France, is five months pregnant and their first daughter, Celeste, is two years old. But they fear sinking further into the red with the costs of childcare and school fees on the horizon.

The couple have a 25-year £305,000 interest-only mortgage with Cheltenham & Gloucester, fixed until May 2009 at 5.29 per cent. To pay for home improvements, they took out an extra £20,000 fixed-rate loan at 5.99 per cent until June 2010, also with C&G.

"We would like to spend another £5,000 on furnishings and wall repairs, and build up enough capital to have the option of moving to a larger home," says Paul.

However, they already pay around £1,500 a month on the mortgage for their three-bed flat in Kilburn, north London, bought for £320,000 in May last year.

The couple have a combined salary of £75,000. He works in telecoms; she is a part-time NHS physiotherapist. They have £3,000 in a cash individual savings account (ISA) paying 5.9 per cent with Alliance & Leicester, which will be used to repay a small loan from Stephanie's mother.

They hope their children will go to a UK-based French school. "If the kids don't get into the French schools then private education can be much more expensive," adds Paul.

For retirement needs, Stephanie is paying 6 per cent of her earnings into the NHS final salary pension scheme. Paul has a total of £32,000 in two stakeholder personal pensions with Friends Provident.

In addition, Paul has £200,000 worth of life cover through Norwich Union.

The cure

With a hefty interest-only mortgage, Paul and Steph-anie must be realistic about their financial future, warn our panel of independent financial advisers (IFAs). They must cut out any unnecessary expenses and pay down their loan before turning to long-term aims such as moving to a larger home.

Property

They should switch to a repayment loan, says Jason Witcombe of IFA Evolve Financial Planning, because in paying only interest and not the capital sum, they aren't making a dent in their substantial debt. "If they can't afford the repayments then they are currently living beyond their means."

Unless interest rates fall, their monthly payments will soar when the fixed-rate period ends. They should avoid getting stuck on the lender's standard variable rate by remortgaging.

Savings/investments

Their short-term savings must be bolstered by building up an "emergency fund" of between three and six months' income, stresses Simon Hodge of IFA Simon Hodge Financial Planning. The National Savings ISA, paying 6.3 per cent, is a good home for their cash.

Once this cushion is in place, Paul and Stephanie should invest in a stocks and shares ISA as this is likely to produce greater returns over the long term.

Retirement

Stephanie is lucky to be a member of a lucrative final salary scheme. Paul, though, is paying into two personal pensions – one with higher fees than the other. Mr Witcombe advises switching so that all the money is in the plan with the lower charges.

Protection

Paul's life policy won't pay out enough to cover the mortgage. What's more, Stephanie doesn't have any life cover. Mr Witcombe says the sum assured on Paul's plan must be boosted not only to cover the mortgage but also to take into account costs such as childcare. In addition, the policy should be extended to cover Stephanie.

As they are more likely to suffer a serious illness than die, income protection would cover them if they were unable to work.

"If Paul's business is doing well, it might be worth suggesting that his employer puts this type of cover in place as a staff benefit," says Mr Witcombe.

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