The problem: The flat, the debts and the limit on earnings
Trying to make ends meet as a single parent is a struggle for Lucy Davies. Although her work as a freelance public affairs consultant gives the 36-year-old from Tulse Hill, south London, the flexibility to look after her five-year-old daughter, she finds it hard to juggle the dual role of mother and breadwinner.
"I work every hour I can but still have to take time off to collect my daughter from school," she says. "I try to live on as little as possible, but it's not easy."
Earning around £24,000 a year, Lucy has been unable to put any money by in savings or investments. She also has debts to contend with, including £7,000 on a credit card from Egg and around £200 on a longstanding student loan - though she will have paid this off by the end of August.
Lucy bought a three-bedroom maisonette for £212,000 in December 2004 and has since spent time and money revamping its interior - pushing its value up to £280,000.
However, she recently found out from the freeholder that the property is due for a "full external renovation" [to upgrade the outside of the building]. Faced with a substantial service-charge bill of £10,000, she has had to remortgage.
"My initial mortgage was for £160,000 but I've now borrowed an extra £40,000 to cover the service charge - and to allow me to consolidate the personal loan [taken out to pay for her own renovations] and other debts."
As a result, Lucy now has a £200,000 Standard Life mortgage. This is an interest-only deal at 4.9 per cent, which sets her back £830 a month.
She is concerned about the size of these repayments and worries that she may have to sell the maisonette. "It would break my heart after having put so much work into it."
When her daughter is a little older, Lucy wants to be in a position to afford out-of-school childcare so that she can work longer hours and earn more. "It is my goal to achieve a secure home for the two of us."
To this end, Lucy pays £57 a month for a mortgage-protection policy - in case she can't meet her repayments due to illness or unemployment - and £37 a month for private medical cover.
She is also concerned that she has not yet started a pension.
The cure: You may have to move. 'This is no way to live'
Lucy needs to cut back her expenditure to the essentials, says Caroline Anstee at independent financial adviser (IFA) Elements.
It is also worth having a chat with a debt counsellor at a body such as Citizens Advice, she adds.
Mike Pendergast from IFA Zen Financial Services says Lucy should definitely consider selling up and downsizing.
He also asks if Lucy has claimed all the financial help to which she is entitled. "As a single parent, she should receive a reasonable amount of support for childcare, and extra tax credits. She should contact the benefits agency."
Debts and savings
Philippa Gee from IFA Torquil Clark says Lucy is doing a "fantastic job" in trying to find a balance between earning money and caring for her daughter. "But if she really wants to wipe out her debt and start saving, she needs to be very strict."
So even though Lucy doesn't spend much now, she should take a tough approach to anything that might be superfluous.
"She could establish a weekly amount that will cover all of her outgoings and then strive to keep to this limit - perhaps by withdrawing this sum at the beginning of the week."
Lucy has been making regular repayments on her student loan, and once this is cleared at the end of next month, she should divert the same sums into whittling down her credit card balance, adds Mr Pendergast.
These are the solutions Lucy could apply now. In the future, says Ms Gee, she could improve her income by working longer hours. Alternatively, she may be able to use her experience and knowledge as negotiating tools to secure higher contractual employment rates.
Another approach to boosting future earnings, Ms Gee continues, is to study for further relevant qualifications.
Lucy has in effect borrowed more than eight times her salary on the mortgage, says Mr Pendergast. "This is clearly well in excess of what she can afford: her monthly repayments are around 55 per cent of her net income."
He also points out that she is covering only the interest on the mortgage. "This cannot continue indefinitely as she has no repayment vehicle in place [to clear the whole home loan at some point in the future]."
Lucy should think about selling up and moving somewhere cheaper - using the equity she has created in her home as a deposit - he says.
Ms Gee agrees that while Lucy may be emotionally attached to her home, she should look at the situation "a little more coldly".
"At present, she is weighed down by the constant worry that she will not be able to make the mortgage repayments," she says. "This is not any way to live. Lucy needs to consider [a move] or even renting in the short term."
Lucy does need to think about starting a pension as soon as possible, says Mr Pendergast.
The tax breaks available for investing in a pension, whether an occupational or personal scheme, make it one of the most efficient ways of setting money aside for your old age.
"However, her priority at the moment must be either to increase her income or reduce her mortgage."
Mr Pendergast suggests Lucy try shopping around to see if she can secure a better mortgage-protection deal. The £57-a-month premium seems "a little expensive"; industry averages suggest it should be closer to £40.
Given the many demands on her finances, Ms Anstee says Lucy needs to ask whether private medical insurance is essential expenditure.
It is worth checking to see if her employer offers any income protection or sick cover above basic statutory sick pay.
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