Wealth Check: This Renae won't walk away, but can she buy a home?
Sunday 08 October 2006
The problem: Debts cast a cloud over a Canadian's ambitions
Two years after moving to the UK, Canadian Renae Satterley wants to turn her money "into something substantial".
The 36-year-old, who lives in south-east London, earns £23,000 a year looking after rare books at the Middle Temple Library, which houses legal works.
She already has £1,000 in a mini cash individual savings account (ISA) with HSBC, paying 4 per cent interest, and she is now trying to put aside £300 each month to build a deposit for a flat.
"I was renting in Canada and have been renting since I moved to London, and would now like to buy my own place. The sooner I can do this, the better." Each month, Renae pays £520 in rent, £80 on bills and £500 on transport and living expenses.
There is also some debt to wrestle with. Although she has managed to whittle down her UK credit card debt to just £240 on an HSBC Mastercard, an C$8,000 (£3,800) student loan is still outstanding. This is paid down with separate savings held in a Canadian account but her worry is that this "cache" will run out next April. "At that stage, I'll have to work out a way of paying off this debt from the funds held in my UK account."
With an eye on the longer term, Renae also wants to start investing in stock market funds.
As for retirement, she joined a non-contributory final salary pension scheme with her employer in July 2005.
She has no protection policies.
The cure: The overseas student loan must be repaid first
Renae's priority should be to clear her student loan, says Philippa Gee of independent financial adviser (IFA) Torquil Clark. "Assuming she pays an interest rate of at least 7 per cent, I would suggest she targets the repayment of this money as soon as possible."
This will mean her plans to save for a house "take a back seat" for at least six months, warns Ben Yearsley of IFA Hargreaves Lansdown.
Gillian Cardy from IFA Professional Partnerships adds that Renae should hold off investing in the markets until she has bought a property.
To pay off her Canadian loan, Renae must first increase her UK savings, says Mr Yearsley. "The best way is to build up enough money in sterling [between now and next April] and then pay off the debt in one go. If not, she will face the problem of having to transfer money to Canada every month [from April 2007] - and could get a poor exchange rate and be hit with currency-translation fees for every transaction."
If Renae uses the £1,000 ISA money to pay off her loan debt, he adds, she must then start again with another mini cash ISA.
There is no point in Renae building up equity exposure if she wants to buy a property in the next few years, says Ms Gee, as shares should be held for seven to eight years to ride out any stock market fluctuations.
Once she has purchased her home, Ms Gee recommends she look at investing in a fund rather than buying shares directly in individual companies.
"There are many funds to choose from, ranging from lower-risk UK large companies to the ultra-extreme emerging markets," she says. "Renae can choose one that suits her appetite for risk, and ideally, split her money between a number of funds to gain even greater diversification."
On a £23,000 salary, Renae will struggle to afford a place on her own, warns Ms Cardy. "She could consider buying with a friend and sharing the costs. Alternatively, she may need to think about buying somewhere considerably cheaper than London."
If she settles most of her debts and amasses a small deposit, Renae will be able to secure a better mortgage deal than she would opting for a 100 per cent loan. Another option is a "guarantor" mortgage, where a family member underwrites the repayments and so makes the borrower eligible for a bigger loan.
However, Ms Gee suggests that while renting may seem poor value for money, it may be sensible for the next few years. "Renae needs to consider her longer-term objectives, and whether she will remain in the UK or return to Canada," she says. "It's not just the monthly costs of a mortgage she would need to commit to but also the one-off costs - the deposit, legal fees, stamp duty and valuation fees."
Renae is "fortunate" to be in a final salary scheme, says Ms Cardy. "This is worth a vast amount of money. She should think carefully about the consequences if she were to leave her present employer."
Mr Yearsley urges her to check she is paying the correct national insurance contributions to ensure she qualifies for the UK state pension scheme.
Renae should see what benefits are offered by her employer, particularly for income protection, says Ms Cardy. "Meeting her financial goals is going to be closely linked to her continued good health and earning capacity."
She may have to set up her own separate policy to cover her income in the event of long-term illness or injury.
There is little point in Renae taking out life insurance as she has no dependants.
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